Are we on the return to normality?

BikingBud

ElwoodBlues said:

MattMattMattUK said:

OhWow said:

MattMattMattUK said:

OhWow said:

When these artificially low interest rates started, one mortgage repayment calculator (BBC?) also showed a warning of what the repayments would be if interest rates rise to 10%.

Interest rates were not "artificially low" any more than they could be "artificially high", the interest rate is set by the BoE, not a natural phenomenon. 

OhWow said:

A 1% rise from a 1% interest rate, was always going to be very painful, especially for those who have only bought in the last few years. At least others had a chance to make hay while the sun shined and were able to reduce the amount they borrowed (I hope).

I doubt many people would care about a rise of 1% to 2% and it would not be painful, however any situation where interest rates rise 5-7% is going to be painful not just for individuals, but for the whole economy. 

It sounds like you have only bought in the last few years? From 2008, the rates dropped lower than I have ever seen. These low rates are not the norm.

It is irrelevant when I bought, norms can change, they have been <2% for 15 years, that means that they have become normal.

OhWow said:

Have a look at this chart and you will see "the whole economy" has lived with much higher interest rates, for decades.

https://www.propertyinvestmentproject.co.uk/property-statistics/uk-interest-rate-history-graph/

There have been higher interest rates in the past, however the difference now is that the debt loading is far higher, which means that the cost of servicing the debt will far exceed historic levels with much lower interest rates. If interest rates rise to 5% that will suck more than £240 billion out of the real economy just from mortgage interest, it will have a further impact with linked non-secured debt, corporate debt and the impact on government borrowing. The interest rate matters not if the repayments are affordable, but it matters hugely if it means that instead of spending money in the real economy all people do is pay extra money in debt interest, that is hugely damaging to the economy. 

I am lucky, I could still pay my mortgage if interest rates went north of 10%, but most cannot and many will have to cut back almost all non-essential spending even at 5%. Crippling the economy and saying that it is fine because interest rates were higher thirty or more years ago is idiotic. 

Where is that £240 billion going to go? Who benefits from this? Does it stay in the country or go abroad? Or just vanish into the ether (as it's mostly just made up money by a fractional reserve system anyway)?

Bankers always win?

zappahey

[Deleted User] said:

Unfortunately I think it's highly unlikely that house prices will fall significantly. People just won't sell, they will wait for the market to recover. There will be some forced selling due to the interest rates and people defaulting on their mortgages, but it's not going to make houses affordable in any meaningful sense of the word.

The problem with that theory is that prices are set at the margins, so those forced sales set the market price against which surveyors value the next house that comes up for sale.

All those sales driven by death, divorce, redundancy would be the ones that set the price, especially if buyers are struggling to get affordable mortgages. Not suggesting it's going to happen but that's how it went in 2008.

dander

I'm really puzzled about how many people seem to be in so much trouble so quickly with this - especially those ones on news stories where they haven't even bought their houses yet and they are saying this rise will make it unaffordable. When I remortgaged about 18 months ago, I clearly remember being given projections of what the repayments would be at higher rates (i think they gave me 3% and 8% as examples). Given how much effort they go to assess us for "affordability", I assumed that the banks were basing their mortgage offers on whether they thought we could afford to still keep up payments at these higher rates. But if people are having to drop out of house purchases because they can't afford 6% it suggests that the banks have still been busy throwing mortgages of unsuitable sizes at people and learned nothing from their subprime idiocy.
Seems like that conversation about interest rates as part of the application process is really just "tick the box and move on" rather than a serious attempt to ensure people are taking out mortgages they can realistically pay back.

housebuyer143

dander said:

I'm really puzzled about how many people seem to be in so much trouble so quickly with this - especially those ones on news stories where they haven't even bought their houses yet and they are saying this rise will make it unaffordable. When I remortgaged about 18 months ago, I clearly remember being given projections of what the repayments would be at higher rates (i think they gave me 3% and 8% as examples). Given how much effort they go to assess us for "affordability", I assumed that the banks were basing their mortgage offers on whether they thought we could afford to still keep up payments at these higher rates. But if people are having to drop out of house purchases because they can't afford 6% it suggests that the banks have still been busy throwing mortgages of unsuitable sizes at people and learned nothing from their subprime idiocy.
Seems like that conversation about interest rates as part of the application process is really just "tick the box and move on" rather than a serious attempt to ensure people are taking out mortgages they can realistically pay back.

I don't think it's that people can't afford it, it's that the banks are reducing the loan they will now lend due to all these rising factors. Those who were borrowing top of their budget might get £50k less now which means they can't afford the house they offered on. 

fewcloudy

dander said:

I'm really puzzled about how many people seem to be in so much trouble so quickly with this - especially those ones on news stories where they haven't even bought their houses yet and they are saying this rise will make it unaffordable. When I remortgaged about 18 months ago, I clearly remember being given projections of what the repayments would be at higher rates (i think they gave me 3% and 8% as examples). Given how much effort they go to assess us for "affordability", I assumed that the banks were basing their mortgage offers on whether they thought we could afford to still keep up payments at these higher rates. But if people are having to drop out of house purchases because they can't afford 6% it suggests that the banks have still been busy throwing mortgages of unsuitable sizes at people and learned nothing from their subprime idiocy.
Seems like that conversation about interest rates as part of the application process is really just "tick the box and move on" rather than a serious attempt to ensure people are taking out mortgages they can realistically pay back.

@dander

What you need to realise is that an increase in the interest rate is just one of several shocks to hit mortgage owners.

The lender didn’t sit down and say “Right, let’s just check how you’ll manage with interest rates at 8%, energy direct debit at least double, fuel prices at 2 quid a litre, and inflation over 10%…c’mon.

You seem to be fixating on one short sharp shock whilst failing to see the bigger picture.

dander

The lender didn’t sit down and say “Right, let’s just check how you’ll manage with interest rates at 8%, energy direct debit at least double, fuel prices at 2 quid a litre, and inflation over 10%…c’mon.

I think you've misunderstood my point - I'm talking about these people who I've seen on the news who haven't even bought yet, so they must have gone through the application in the last 6 months in full knowledge of everything you mention.

Of course what's on the news may not be the true picture and there may be other aspects of these stories that we haven't been told. I don't know these people personally. But I still can't understand why in this environment lenders were offering mortgages in the last few months, especially when rates had already started creeping up, without genuinely assessing affordability in the current climate. 

Kim1965

BikingBud said:

As we come to the end of artificially suppressed interest rates are we seeing a return to historic normality?

Yes. 
I guess its part of a cycle. I remember 13%rates, years of negative equity lots of people walking away from their properties.
 Property is due a huge correction and normal interest rates are going to hasten this. Its nothing new, the human cost will be awful though. 
 People will pay down their mortgage as a priority. Cheap money has ended. 

brownbagsFTB

It won’t go to 13%, people have much bigger loans than back in the day so it’s not feasible, even for the comfortably well off. They’ll have to bring in measures to freeze the rates if interest continues to rise in the next 12-18 months. I doubt it will get that far, there’s a lot of opposition for this mini budget so things will probably start to calm down soon (or we’ll see a general election) 

sammyjammy

brownbagsFTB said:

It won’t go to 13%, people have much bigger loans than back in the day so it’s not feasible, even for the comfortably well off. They’ll have to bring in measures to freeze the rates if interest continues to rise in the next 12-18 months. I doubt it will get that far, there’s a lot of opposition for this mini budget so things will probably start to calm down soon (or we’ll see a general election) 

It doesn't work like that, interest rates are about more than residential mortgages, the rates will go to what they need to be, if people fall by the wayside then so bit it, its happened before and it will happen again.

brownbagsFTB

@sammyjammy yes I know, I was referring to government intervention (sorry that wasn’t clear). They’d probably have to come up with a scheme to either discount mortgage rates specifically or freeze them at a certain level. Such a large number of people losing their homes isn’t good for anyone. In the past, they have introduced schemes for people to offset high mortgage rates so there is a precedent