£1.50 for every £1 borrowed...
Discussion
DogRough said:
Surely this is the whole point of the MMR stress testing requirements? If someone is going to struggle if rates went up to 3%, then I would say they are currently over extended.
While we are unlikely to see the bad old days of 15% base rates anytime soon, a return to a more normal 4-6% is likely within the next 5+ years.
I can forsee a lot of people coming a cropper, and then blaming the Government and/or lenders for irresponsible lending
I'm sure you're right. If house prices start to fall (they already are in many areas in real terms) then these over extended people will find themselves trapped by negative equity too. Especially those like the chap mentioned who is mortgaging over 35 years therefore buying a pathetic amount of equity each year in a stable or growing market. While we are unlikely to see the bad old days of 15% base rates anytime soon, a return to a more normal 4-6% is likely within the next 5+ years.
I can forsee a lot of people coming a cropper, and then blaming the Government and/or lenders for irresponsible lending
Surely now is the time for lenders to start reducing multiples and term lengths to force people into a situation where when rates rise significantly they can at least extend their terms to make their monthlies affordable again. If you're already mortgaged over 35 years at 90+% LTV there's really nowhere to go except default!
When we took out our mortgage we were offered a multiple of 4.5 despite my girlfriend having a fairly mediocre credit rating, we only took 3x and felt that was comfortable. 4.5 times with the prospect of rising rates would have made me nervous.
I got my first mortgage nearly 20 years ago, rates were ~8% as I recall, there is people around who will tell tales of rates in double figures in the eighties and nineties.
It can happen and to be honest a period of rising interest rates isn't terrible for all concerned and its usually an indication or pressure on inflation which can be good if you've got debt as theoretically you wages will be rising and debt will be partially inflated away.
That said the last decade of quantitative easing and cow towing to corporate interest has largely resigned traditional economic theory to the dustbin... Anyhow... The old adage that you should not overstretch yourself but at the same time stretch yourself enough to ensure you're not spunking spare money on film flam is a universal truth.
It can happen and to be honest a period of rising interest rates isn't terrible for all concerned and its usually an indication or pressure on inflation which can be good if you've got debt as theoretically you wages will be rising and debt will be partially inflated away.
That said the last decade of quantitative easing and cow towing to corporate interest has largely resigned traditional economic theory to the dustbin... Anyhow... The old adage that you should not overstretch yourself but at the same time stretch yourself enough to ensure you're not spunking spare money on film flam is a universal truth.
It's worth remembering as well that every time you re mortgage your incur fees, which for a lot of people are often just added to debt as they don't have £1500 of whatever it is knocking about, if your mortgage is sub £100k territory this can amount to a pretty serious % and often negate any advantage of the shorter fixed term. Also 25 years of interest on all these fees can seriously extend your debt period, do the sums.
XMT said:
It really is shocking the number of people who never ever pay attention to this stuff. I say it all the time, people get far too happy with a monthly figure and ignore the rest.
I recently took out a mortgage and it clearly states the amount you pay pay for every pound borrowed but I also had a break down of each year.
I have a fixed 5 year deal and even that is shocking how much you pay in interest in the first 5 years of this super low rate (however I fully expected this anyway), after that is day light robbery (again fully expected).
Personally I am not worried because I am not planning to keep the thing long at all but it doesnt change the fact that far too many ignore the total they pay back. Utterly pointless your house going up 10-20 or 30k when your interest amount being paid is a daily shafting session
I'm totally with you, except for that bit. At present the interest is very low for what you're getting. Imagine if you were lending money to a complete stranger, 2% interest looks like a pitiful return.I recently took out a mortgage and it clearly states the amount you pay pay for every pound borrowed but I also had a break down of each year.
I have a fixed 5 year deal and even that is shocking how much you pay in interest in the first 5 years of this super low rate (however I fully expected this anyway), after that is day light robbery (again fully expected).
Personally I am not worried because I am not planning to keep the thing long at all but it doesnt change the fact that far too many ignore the total they pay back. Utterly pointless your house going up 10-20 or 30k when your interest amount being paid is a daily shafting session
Edited by XMT on Tuesday 18th July 13:59
If you take an introductory fix, overpay at least up to what the standard repayments are going to be. At least that way you won't be shocked when your repayments increase.
Wacky Racer said:
Mortgage rates rose to 15% briefly around 1991, people today paying rates less than 3% don't know they are born...
Make hay while the sun shines....
My Dad's favourite retort. Tiresome. I'd happily pay 15% for a few months if [in TODAYS money] i.e. with equivalent inflation my house was 150k not 550k to buy . Make hay while the sun shines....
I'd happily have high interest rates if I could have a nice 5 bed place in Fulham for 250k and have a 120k mortgage that I pay off 12 years early.
Mortgage rates now NEED to be under 5% due to debt vs salary. Before it was painful for a while but the debt they had was tiny in comparison. They were still paying the same percentage of their salary at 15% as we do now, even given sub 2% raise as most need a shedload to buy something.
They don't know how lucky they were and how they could save, have one earner AND choose where to live instead of going on some bargain hunt to where they MAY be able to afford.
phew... thats better
Edited by BluePurpleRed on Tuesday 18th July 15:54
DogRough said:
Surely this is the whole point of the MMR stress testing requirements? If someone is going to struggle if rates went up to 3%, then I would say they are currently over extended.
While we are unlikely to see the bad old days of 15% base rates anytime soon, a return to a more normal 4-6% is likely within the next 5+ years.
I can forsee a lot of people coming a cropper, and then blaming the Government and/or lenders for irresponsible lending
I really don't see that happening 4% in 5 years with no sign of even a 0.25% rise anytime soon. It needs to happen but I don't see it in 5 years too many people would be in the crap. While we are unlikely to see the bad old days of 15% base rates anytime soon, a return to a more normal 4-6% is likely within the next 5+ years.
I can forsee a lot of people coming a cropper, and then blaming the Government and/or lenders for irresponsible lending
BoRED S2upid said:
I really don't see that happening 4% in 5 years with no sign of even a 0.25% rise anytime soon. It needs to happen but I don't see it in 5 years too many people would be in the crap.
Not that many people as someone pointed out, the majority of homes are held without debt and of those that are a significant number are BTL so it doesn't matter if they default as the tennents will just pay their rent to the new landlord. The key priority is that the lenders don't default, which is why all the stress testing, bolstering of balance sheets and raising of margin rates. Once they are protected then not only does it not matter if some owners default but it is essential market forces that clear out the over leveraged and re-open the market for new owners. Exactly what should have been allowed to happen in 2008 but was too big a hit to the lenders to permit. The Govt, regulator and lenders have worked for ten years to try and ensure that next time defaults can be allowed to happen freely. Borrowers have also had the same ten years to ensure they are not at risk of default also.
As for the speed at which rates can move, when the change begins it will all be nice and slow and well publicised in advance. We'll stage managed. But there will be a period when rates are out of control as they play catch up and have to over shoot to bring inflation back under control and then you'll see 100 points added at a time, out of the blue and without any warning and less than a few months since the previous 100 point shot. You could easily go from 3% to 7 in under a year once the currency speculators take a hold and start smashing it.
Also, the next head of the ECB is likely to be German and whereas Drahgi doesn't want to return to Italy as the man who bankrupted Italy with rate hikes, the Germans are extremely keen to start raising rates.
Personally, I think the writing is clearly on the wall in the West that we are now in the upward cycle and that there will be a period in that cycle when the hikes are out of control.
Edited by DonkeyApple on Tuesday 18th July 17:03
DogRough said:
It's also much more to do with the fact that the interest on mortgages is heavily front loaded, than anything to with the actual interest rate. So for example in the first year a £500 payment would be broken down as say £490 interest, £10 capital. In the last year, it would be more £490 capital, £10 interest.
(Please note that for the pedants, these figures are for illustrative purposes only, they are not designed to be 100% accurate!)
I know that's an example but at current interest rates you are miles out. At 3% the payments in the first year are about 50/50 interest and principal. (Please note that for the pedants, these figures are for illustrative purposes only, they are not designed to be 100% accurate!)
At 10% though it's nearly all interest - per £100K you don't even pay off £1K.
DogRough said:
As I was saying. for the benefit of any pedants................
My point was (and is) that the interest paid in the first five years is heavily front loaded and not representative of the whole loan.
Sure, but if you're going to give an example then at least make it vaguely representative.My point was (and is) that the interest paid in the first five years is heavily front loaded and not representative of the whole loan.
Anyway, it's not like they shift the interest around. It's just a natural function of the way the principal reduces.
anonymous said:
[redacted]
Yes, the 15% panic increase because politicians thought they could stop the free movement of foreign exchange rates.
The Exchange Rate Mechanism, which was supposed to be a preliminary before joining the Euro, was never going to work, in theory or in practice. Probably a good job it failed, but how did we even get into that mess?
The difficulty re debt servicing, must be one reason that the Bank of England has been reluctant to raise interest rates.
However, the present interest rates are now the lowest since 1694, and that is certainly encouraging more borrowing, probably excessive borrowing.
If people ignore the likelihood of higher rates of interest, they are doing so at their peril. Those who do not know what has happened in the past, even just the past 50 years, are going to have a nasty shock. When is not known, but history has shown that it will happen at some time.
In rather simple terms, but it does show the principle.
Interest rates move up from say 1% to 2%.
Seems like only a 1% increase, but of course it is really a 100% increase.
Think how these upward movements will affect interest repayments.
.
What's important to recognise though is that the delay on rates is about giving enough time to lenders to shore up their books. It's not being done to give consumers time to get their borrowing under control.
Consumers simply don't self regulate in that way. Hence why the recent lending legislation around property debt over the last few years has been about forcibly restricting margin levels and ensuring all lenders can survive the consumer defaults that categorically will be happening.
The consumer review by the regulator has seen almost every aspect of the study being pushed out date wise due to Brexit. There is now the need to balance the reigning in of consumer debt with the negative impact of the stalling of consumer spending. The rumour is that the FCA has been leant on to now not make big changes that would jeopardise both employment and retail debt consumption.
It is very clear that all activity for the last few years and now is about ensuring the lenders are secure and those who have low debt levels are able to keep spending but the massive over consumers and borrowers are not to be bailed out this time but cleared out through market forces.
Consumers simply don't self regulate in that way. Hence why the recent lending legislation around property debt over the last few years has been about forcibly restricting margin levels and ensuring all lenders can survive the consumer defaults that categorically will be happening.
The consumer review by the regulator has seen almost every aspect of the study being pushed out date wise due to Brexit. There is now the need to balance the reigning in of consumer debt with the negative impact of the stalling of consumer spending. The rumour is that the FCA has been leant on to now not make big changes that would jeopardise both employment and retail debt consumption.
It is very clear that all activity for the last few years and now is about ensuring the lenders are secure and those who have low debt levels are able to keep spending but the massive over consumers and borrowers are not to be bailed out this time but cleared out through market forces.
DogRough said:
mjb1 said:
XMT said:
It really is shocking the number of people who never ever pay attention to this stuff. I say it all the time, people get far too happy with a monthly figure and ignore the rest.
I recently took out a mortgage and it clearly states the amount you pay pay for every pound borrowed but I also had a break down of each year.
I have a fixed 5 year deal and even that is shocking how much you pay in interest in the first 5 years of this super low rate (however I fully expected this anyway), after that is day light robbery (again fully expected).
Personally I am not worried because I am not planning to keep the thing long at all but it doesnt change the fact that far too many ignore the total they pay back. Utterly pointless your house going up 10-20 or 30k when your interest amount being paid is a daily shafting session
I'm totally with you, except for that bit. At present the interest is very low for what you're getting. Imagine if you were lending money to a complete stranger, 2% interest looks like a pitiful return.I recently took out a mortgage and it clearly states the amount you pay pay for every pound borrowed but I also had a break down of each year.
I have a fixed 5 year deal and even that is shocking how much you pay in interest in the first 5 years of this super low rate (however I fully expected this anyway), after that is day light robbery (again fully expected).
Personally I am not worried because I am not planning to keep the thing long at all but it doesnt change the fact that far too many ignore the total they pay back. Utterly pointless your house going up 10-20 or 30k when your interest amount being paid is a daily shafting session
Edited by XMT on Tuesday 18th July 13:59
If you take an introductory fix, overpay at least up to what the standard repayments are going to be. At least that way you won't be shocked when your repayments increase.
(Please note that for the pedants, these figures are for illustrative purposes only, they are not designed to be 100% accurate!)
DogRough said:
It's also much more to do with the fact that the interest on mortgages is heavily front loaded, than anything to with the actual interest rate. So for example in the first year a £500 payment would be broken down as say £490 interest, £10 capital. In the last year, it would be more £490 capital, £10 interest.
And the reason for the front loaded interest is to keep monthly repayments level. If you paid an equal amount of capital every month, at the beginning when you owe the full amount, there'd be a huge amount of interest, and at the end when your remaining mortgage is small, payments would be tiny. People don't want that, because early on is normally when they can least afford it. 150k at 2% costs off a total of 190k, with a monthly repayment of £636 = £7632 per year.
In year one, it's £4761 of capital + £2871 of interest
In year 25, its £7550 of capital + £82 of interest
That's why it's not terribly important to pay off the last bit early. The interest is nearly all paid already.
XMT said:
Competely agree. The rate I got was 2.15% for the 5 year fixed and the plan is to not have one after the 5 years. everyones situation is different
We remortgaged yesterday at 1.94% on a 5 year fix. Barclays massively overvalued our house, we thought we'd be looking at 85% LTV but thanks to their pie in the sky figures worked out at 75.2%. My girlfriend isn't in a position to overpay at the moment and insists on paying half of everything so hopefully from 2019 we can start throwing money at it. We have 23 years left now but hoping to cut it to 10 after the fix is up, interest rate dependent of course.At current rates we should be looking at say a third of the value in interest max, my parents worked on paying double, thankfully their house was worth quadruple what's they paid for it so they, removing inflation, probably got £1.50 for every £ invested. That is not going to be the case for my generation.
anonymous said:
[redacted]
So you would never consider overpaying your mortgage repayments, but you were happy to shorten the term by 2 years?? Makes no sense as they're both effectively the same thing - you overpay, it reduces your mortgage balance and shortens the term. The only difference is shortening the term forces you to pay more each more, at least a voluntary overpayment can suspended. But try going back to the lender and asking them to tack that extra 2 years back on the mortgage because you can't afford the monthly repayments, probably won't go down well!I'm not a huge fan of shortening a mortgage term to under 20. Unless you genuinely know that you lack the discipline to make over payments or your borrow is so low that you'll be able to cover it regardless then the flexibility of a deal that maintains a conventional term and allows you to over pay is going to be much healthier.
People should take note that in the current climate of 1-2% property debt rates if someone needs equity fast the second lien industry currently quotes 9-14%. Something worth bearing in mind for people who are head of a household and have an obligation to be able to handle those little quirks of life that come out of the blue. There is a value to being financially flexible and it's worth considering that value in any decision that will leave you either short of cash reserves or tied into a more aggressive than the norm debt repayment program.
People should take note that in the current climate of 1-2% property debt rates if someone needs equity fast the second lien industry currently quotes 9-14%. Something worth bearing in mind for people who are head of a household and have an obligation to be able to handle those little quirks of life that come out of the blue. There is a value to being financially flexible and it's worth considering that value in any decision that will leave you either short of cash reserves or tied into a more aggressive than the norm debt repayment program.
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