Advice: Interest Rates going up and house prices going down

Sarah1Mitty2

snowqueen555 said:

Just a 1% increase in interest rates reduces your purchasing power by 10%.

House prices really need to reduce by 10-20% I think to be at the same affordability. I don't think that will happen across the board and if it does, it will be slow.

I'm seeing some reductions on the less desirable flats near me but still not enough.

If you look at sales volumes/mortgage approvals it is more or less happening in real time, each interest rate rise reduces the number of houses that can sell without a price cut and the number of people who want to borrow at current prices. Some sellers will be slow to accept the new normal, and many may never sell their property but they are not the "market makers" and are therefore not all that important.

Strummer22

GDB2222 said:

RetSol said:

gazfocus said:

I read that if you're currently on a low interest rate with your fixed mortgage, your best option would be to squirrel away as much as you can into a high interest rate savings account (there's a few that are 4-5% now), then when your fixed term comes to an end, make a lump sum overpayment to your mortgage and then move onto a new fixed rate.

There's no point overpaying your mortgage at the moment because the interest rate is low so you'd 'earn more' in a savings account by comparison.

In principle, this is correct. 

However, depending on how disciplined you are, there may be something to be said for overpaying now (to the extent that you can without paying a penalty).

Once paid into the mortgage account, the cash is "gone" and you won't be tempted to spend it on anything else. 

You may be right about human nature, but are people really that childish about their mortgage money?

Yes. Do you know any people? ;-)

Sarah1Mitty2

GDB2222 said:

RetSol said:

gazfocus said:

I read that if you're currently on a low interest rate with your fixed mortgage, your best option would be to squirrel away as much as you can into a high interest rate savings account (there's a few that are 4-5% now), then when your fixed term comes to an end, make a lump sum overpayment to your mortgage and then move onto a new fixed rate.

There's no point overpaying your mortgage at the moment because the interest rate is low so you'd 'earn more' in a savings account by comparison.

In principle, this is correct. 

However, depending on how disciplined you are, there may be something to be said for overpaying now (to the extent that you can without paying a penalty).

Once paid into the mortgage account, the cash is "gone" and you won't be tempted to spend it on anything else. 

You may be right about human nature, but are people really that childish about their mortgage money?

Isn`t it the case that a lot of people simply won`t have any extra "mortgage money" anyway?

GDB2222

Strummer22 said:

GDB2222 said:

RetSol said:

gazfocus said:

I read that if you're currently on a low interest rate with your fixed mortgage, your best option would be to squirrel away as much as you can into a high interest rate savings account (there's a few that are 4-5% now), then when your fixed term comes to an end, make a lump sum overpayment to your mortgage and then move onto a new fixed rate.

There's no point overpaying your mortgage at the moment because the interest rate is low so you'd 'earn more' in a savings account by comparison.

In principle, this is correct. 

However, depending on how disciplined you are, there may be something to be said for overpaying now (to the extent that you can without paying a penalty).

Once paid into the mortgage account, the cash is "gone" and you won't be tempted to spend it on anything else. 

You may be right about human nature, but are people really that childish about their mortgage money?

Yes. Do you know any people? ;-)

Apparently, the only people I know have grown up. Mind you, I am getting on a bit, so maybe most of the people I know are pretty adult?

Sarah1Mitty2

snowqueen555 said:

Just a 1% increase in interest rates reduces your purchasing power by 10%.

House prices really need to reduce by 10-20% I think to be at the same affordability. I don't think that will happen across the board and if it does, it will be slow.

I'm seeing some reductions on the less desirable flats near me but still not enough.

There seems to be a contradiction there? The pace of rate rises (and stated intent to raise more) suggests to me far bigger drops than that, people have debt on much more than just mortgages nowadays and will be affected all along the debt curve,, but I accept that people are still spending (not on houses though) and that must be due to using up credit cards and savings?

Martico

There are still many people that earn more than they spend. The "lower end", for want of a better phrase, are being squeezed to a massive extent by rental prices, mortgage rates and general life costs, and many in the middle are paring back in the face of increased costs. But some are fine. It's very nuanced and complex. Overall effect, if we want to generalise, is that money is being taken out of the system, which is the desired effect of the policy. And many are suffering from that. But many are also fine.

I agree that the economy is somewhat broken, as inequalities are worsening in both "good" times and "bad". I've no idea of the ultimate outcome.

snowqueen555

Sarah1Mitty2 said:

snowqueen555 said:

Just a 1% increase in interest rates reduces your purchasing power by 10%.

House prices really need to reduce by 10-20% I think to be at the same affordability. I don't think that will happen across the board and if it does, it will be slow.

I'm seeing some reductions on the less desirable flats near me but still not enough.

If you look at sales volumes/mortgage approvals it is more or less happening in real time, each interest rate rise reduces the number of houses that can sell without a price cut and the number of people who want to borrow at current prices. Some sellers will be slow to accept the new normal, and many may never sell their property but they are not the "market makers" and are therefore not all that important.

We've had high rates since the start of the year though, hopefully things will happen quicker now. I have noticed this week more reductions at the bottom end of the market, but these tend to be properties that have been overpriced in the first place.

Sarah1Mitty2

snowqueen555 said:

Sarah1Mitty2 said:

snowqueen555 said:

Just a 1% increase in interest rates reduces your purchasing power by 10%.

House prices really need to reduce by 10-20% I think to be at the same affordability. I don't think that will happen across the board and if it does, it will be slow.

I'm seeing some reductions on the less desirable flats near me but still not enough.

If you look at sales volumes/mortgage approvals it is more or less happening in real time, each interest rate rise reduces the number of houses that can sell without a price cut and the number of people who want to borrow at current prices. Some sellers will be slow to accept the new normal, and many may never sell their property but they are not the "market makers" and are therefore not all that important.

We've had high rates since the start of the year though, hopefully things will happen quicker now. I have noticed this week more reductions at the bottom end of the market, but these tend to be properties that have been overpriced in the first place.

As another poster pointed out recently, historical average for base rate is over 7%, we are not really "high" yet?

Sarah1Mitty2

MobileSaver said:

BendyTaffies said:

There’s also an expectation that the U.K. is going to suffer the worst housing crash in the west,

I don't know where you got that idea from, can you share some of the respected sources predicting such a thing?

Most of the UK housing market players are predicting at worst a drop of 10% over the next few years and pretty much everyone expects house prices to be higher than they are now in just four years time...

Think it was the Telegraph, just as valid as random posters on MSE and market analysts with a VI in property not doing badly?

Strummer22

Sarah1Mitty2 said:

As another poster pointed out recently, historical average for base rate is over 7%, we are not really "high" yet?

The fact that the "historical average" is 7% has been repeated a lot on this forum lately. I think this is referring to the average since about 1971 or something like that? I'm not sure why we should be ignoring data before that, but never mind.

The 7% figure over this timescale is accurate: 


However, the rate never went below 5% between the early 70s and the early 90s.

Taking the Nationwide house price index (https://www.nationwidehousepriceindex.co.uk/download/uk-house-prices-since-1952), the annual increase averaged 12.4% from 1971 - 1992, and only 5.7% from 1993 onwards.

So at what time was there (more than one) speculative bubble, enormous house price growth, enormous wage growth, entrenched inflation and crippling interest rates? Was it before 1993? (YES). At any point did houses lose 50-60% of their value, as some are suggesting will happen? (NO). As the preacher said, "there is nothing new under the sun".

What is abundant clear to me is that a 'historical average' interest rate, in isolation, does not equal 'normal'. If we revert to this supposed 'normal' interest rate just because it is the historical average over an arbitrary timeframe, by that logic we would also revert to a historical average house price growth, wage growth, inflation and economic growth. Saying interest rates are not 'high' by historical standards, taken in isolation, is pretty meaningless.