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May 26 2022 1.54am

Interest rates to rise again

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View Rudi Hedman's Profile Rudi Hedman Flag Caterham 06 May 22 5.22pm Send a Private Message to Rudi Hedman Add Rudi Hedman as a friend

Originally posted by Eaglecoops

Yes the interest rate is still low but it therefore means the B of E feel there is room to increase it and every half a percentage point is probably going to mean another couple of hundred or so quid a month to a lot of people. Start adding in cost of living increases, fuel costs etc and it’s a perfect storm that is stoking the case for ruination for those who are already mortgaged to the hilt.

I agree about the shortage of housing forcing up values through under supply but only whilst they are still affordable. The ceiling was reached when we had virtually 0% mortgages as there is nowhere else you can go to increase the salary to borrowing ratio. As mortgages increase in monthly cost, affordability will disappear for many and those who want to sell will have to reduce prices down the chain to match new buyers ability to buy. I really cannot see the market going any other way at the moment.

I do also remember the 14 to 15% mortgage that I had to pay for a while on my first property and if that scenario returned, most would be throwing their keys back to the lenders.

Good article in the FT dated 1st April [Link]

Another month, and another letter from my mortgage lender arrives. The Bank of England’s decision to increase the base rate means the repayment on my tracker loan is inching up — again.

Am I bothered? Hardly. Opting for a lifetime tracker when I remortgaged my London flat in 2008 was one of the best financial decisions of my life.

When I first took it out, the interest rate was about 5 per cent, but soon it dropped like a stone to below 1 per cent. Instead of making lower monthly repayments, I stuck to the original level, then paid off bigger chunks as my pay increased.

The end result is that now, as rates are rising, I’m close to paying it off (the rate was so low, I slowed the overpayments some years ago to beef up my pension and Isa contributions instead).

I’ve benefited handsomely from interest rates staying “lower for longer”, but the prospect of rates getting “higher much sooner” raises all kinds of questions for our personal finances.

Investors are already braced for rapid rises in interest rates as central banks around the world battle higher inflation.

In the US, the Fed recently made its first rate rise since 2018, and is expected to make seven more increases this year (officials expect rates to be nudging 3 per cent by 2023).

In the UK, markets are pricing in rates rising to 2 per cent by the end of this year, though the Office for Budget Responsibility (OBR) has warned rates could hit 3.5 per cent next year if higher inflation persists.

In the race to get inflation under control, economists worry that rapid tightening risks sparking a recession and higher unemployment as businesses (and governments) absorb higher costs of borrowing.

All of this uncertainty is weighing on global equity and bond markets, and raises the unwelcome prospect of “stagflation” — higher inflation combined with slower economic growth.

This is challenging terrain for all investors, but especially those nearing retirement or who have already started drawing an income from their investments.

As discussed on the Money Clinic podcast this week, younger investors are concerned this could spell the end for the traditional 60:40 portfolio split between equities and bonds, and wary of the risks of taking on more equity exposure to expand their funds.

What rising rates will mean for UK property prices is (perhaps) more likely to come up in conversation at your next dinner party.

Considering double-digit house price growth, you might think rising interest rates would take some heat out of the market.

In a recent note, research group Capital Economics described property as the “weak link” as interest rates rise. Nevertheless, it predicted rates would have to get to around 4 per cent to trigger price falls, unless quantitative tightening causes a greater economic wobble than expected (rising unemployment would spook mortgage lenders much more than rising interest rates).

But what about the impact on the consumer economy? As someone with a variable-rate mortgage and rising monthly costs, I am very much in a minority.

Jason Napier, managing director of European banking research at UBS, says that fixed-rate loans now account for around 80 per cent of the UK’s £1.6tn mortgage market.

The fact that so many UK consumers are locked into low rate deals means “as the Bank of England raises rates, very little changes immediately for consumers”, he says.

Outstanding fixes are split pretty much 50:50 between two-year and five-year terms, so the “payment shock” of rolling off on to higher rates is very much a problem for tomorrow.

Even if you have a few years to go on your fix, consider how the OBR’s 3.5 per cent scenario could inflate your monthly repayments.

“The average interest rate on an outstanding mortgage in the UK is 2.1 per cent,” Napier says. “Based on a standard 25-year term, if interest rates went up 1 per cent, this would add around £100 to monthly repayments for every £100,000 you are borrowing.”

Napier feels the scale of rate rises markets currently anticipate is unlikely to push many households into default. Most borrowers will have been “stress tested” on rates of 5-6 per cent, which was the average mortgage rate when Northern Rock failed. But combined with other cost of living pressures, none of this bodes well for consumer spending.

If I had a bigger loan, I’d be scouring my mortgage paperwork to see what level of overpayments I could potentially make (these are often capped at 10 per cent of your outstanding balance per year).

Use a mortgage overpayment calculator to see the potential reductions you could make to your outstanding balance by the time your fix ends. When the time comes, the lower your loan to value, the better the rate you’ll be able to get.

And if the Bank of Mum and Dad has any spare funds, helping adult children with regular gifts from excess income could not only reduce the size of their mortgages, but also shrink future inheritance tax liability.

Changes to the base rate have a less immediate effect on the cost of short-term borrowing, but the record level of credit card spending has raised alarm bells.

It’s impossible to say how much of February’s £1.5bn spending spree — the highest monthly total since records began — is due to hard-up consumers borrowing to beat the rising cost of living or more affluent ones enjoying renewed freedoms.

I chatted to Chris Giles, the FT’s economics editor, who is of the view that both trends are happening at once. With standard bank overdraft rates of 40 per cent, should we be surprised that consumers see the typical 20 per cent charged on credit cards as a better deal?

It turned out we had both used our credit cards to book family holidays for later in the year (the twin attractions of enhanced consumer protection and loyalty points).

We are careful to pay off our monthly balances in full, thus avoiding interest charges, but not everyone can afford to do so — and zero per cent deals are getting much harder to come by.

Perhaps the only silver lining will be better rates of interest on cash savings accounts. For now, new entrant Chase is offering the market-leading rate of 1.5 per cent on account balances of up to £250,000.

This is welcome news for hard-pressed savers, but still nowhere near outpacing inflation which is expected to hit 8 per cent by the end of June.

Taking more risk and investing the money, paying down a chunk of your mortgage, or (dare I say it) spending it on a well-earned holiday may prove to be a better use of your cash.

Yeah, invest in a holiday lol (they didn’t write that)

 


COYP

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View Rudi Hedman's Profile Rudi Hedman Flag Caterham 06 May 22 5.31pm Send a Private Message to Rudi Hedman Add Rudi Hedman as a friend

Reading that FT article confirms my view it’ll need a real recession (many job losses) to damage (prices in) the property market, which will depend on how our central bank(s) manage it. That is unless inflation gets really out of control and in turn interest rates. That’ll get the conspiracy theorists going. All by design together worldwide to capture property.

 


COYP

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View Eaglecoops's Profile Eaglecoops Flag CR3 06 May 22 6.11pm Send a Private Message to Eaglecoops Add Eaglecoops as a friend

Originally posted by Rudi Hedman

Reading that FT article confirms my view it’ll need a real recession (many job losses) to damage (prices in) the property market, which will depend on how our central bank(s) manage it. That is unless inflation gets really out of control and in turn interest rates. That’ll get the conspiracy theorists going. All by design together worldwide to capture property.

Let’s see what happens, that is a surprisingly upbeat analysis of the market. What has been missed is that fixed rate loans are less forthcoming when the market becomes volatile which means new buyers will struggle to get decent low percentage rates over a decent period. Most market signals are for a short term stagnation followed by price reductions.

I am actually more concerned by the impact on a certain percentage of households (mostly younger) than the ability of the market to short term soak up any surplus. People like us who have been around for years have few problems in this respect.

 

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View Rudi Hedman's Profile Rudi Hedman Flag Caterham 06 May 22 6.26pm Send a Private Message to Rudi Hedman Add Rudi Hedman as a friend

Originally posted by Eaglecoops

Let’s see what happens, that is a surprisingly upbeat analysis of the market. What has been missed is that fixed rate loans are less forthcoming when the market becomes volatile which means new buyers will struggle to get decent low percentage rates over a decent period. Most market signals are for a short term stagnation followed by price reductions.

I am actually more concerned by the impact on a certain percentage of households (mostly younger) than the ability of the market to short term soak up any surplus. People like us who have been around for years have few problems in this respect.

All good points. Price stagnation followed by a drop is likely. Just how much of a drop depends on the economy/recession. One advantage of being younger is that if you’re a PAYE employee you’re less likely to be laid off compared to seniors, but higher mortgage costs in addition to higher prices including energy costs is going to test people without a doubt. I wonder if the BoE’s estimated squeeze on people is lower than it’ll be in reality. This is a month after saying people shouldn’t ask for a pay rise.

 


COYP

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