0% rates and mortgages

[1JEB]

It looks like UK base rates might be going to 0%...especially if the US adopts a Zero Interest Rate Policy (ZIRP).

My understanding is that mortagage rates in the UK (especially the 2Y deals) are closely linked to the 2Y interest rate swap rate (currently 2.90% ish).

Notwithstanding a further collapse in the tranisition mechanism between base rates and mortgage costs, how low do people think 2Y mortgage deals could go?

Also, for the mortgage bods, I have a base rates -31bp deal until June...I presume this is floored at 0 if base rates go to 0?!

[Welshbeef]

Are you serious 0% Base rate??

However there are two things here - banks borrow at LIBOR not Base rate, its the hedge funds IIRC that can borrow at Base rate.

In addition to the clearly no bank would ever offer 0% mortgages - unless there is a monumental fee - as if there is no margin in it for them there is no point in being in that business. They have to make hence all the recent talk about "collars".

I guess this next question is going to sound daft - but I dont know the answer I'll ask anyway. Base rate has to be 0% or greater?

[1JEB]

Welshbeef said:

Are you serious 0% Base rate??

However there are two things here - banks borrow at LIBOR not Base rate, its the hedge funds IIRC that can borrow at Base rate.

In addition to the clearly no bank would ever offer 0% mortgages - unless there is a monumental fee - as if there is no margin in it for them there is no point in being in that business. They have to make hence all the recent talk about "collars".

I guess this next question is going to sound daft - but I dont know the answer I'll ask anyway. Base rate has to be 0% or greater?

Yes. Base rates at 0%
http://www.telegraph.co.uk/finance/economics/inter...

I'm aware that banks do not fund at the base rate however the bank of england uses the base rate (amongst other things) to manage short term funding in the UK economy. That is why it is pertinent to mortgage rates.

"Hedge funds" do not fund at the base rate.

I wasn't suggesting that banks would offer 0% mortgages. I was asking IF base rates went to 0%, how low do people think mortgage rates would go.

The base rate cannot go lower than 0%.

Hope that clarifies things!

[Welshbeef]

Yes it does.

I think I might have the answer though - Japan has for many many years been at 0% or very near to 0% all we need to do is find out what rates their banks were offering during those times.

[Plotloss]

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

[Welshbeef]

One thing that could happen now is that the Oil rich countries or Oil companies themselves set up band new banks. Therefore they have zero bad debts have huge reserves and lend to good rated customers. I can really see something of this ilk happening.

[1JEB]

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Thanks! I guess that excludes the short term introduction deals though? It seems the mortgage banks have given up on getting new business for the moment which I guess will mean very few "great" deals in the near future.

Japan is the interesting example of the effectiveness (or not) of ZIRP.
My personal opinion is that at these levels the social physcology starts to become important. Japanese consumers wouldn't spend however "cheap" it was. I can't see that happening in the UK anytime soon...

[BigAlinEmbra]

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Spot on, I think my deal is 1.99% above base.

RBS forecasts have UK down to 1% and US down to 0.25% over the next year. Unless you're really tight for cash, you might as well maintain your current rate of payment and try to bludgeon your mortgage down imo.

[Welshbeef]

BigAlinEmbra said:

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Spot on, I think my deal is 1.99% above base.

RBS forecasts have UK down to 1% and US down to 0.25% over the next year. Unless you're really tight for cash, you might as well maintain your current rate of payment and try to bludgeon your mortgage down imo.

+1 keep overpaying. Maintain the level of monthly mortgage payment at the high BOE rates you'll save many years & tens of thousands of pounds in interest. There may be better investments to be made but you have made an investment in a house now pay the debt off asap. Live mortgage free live the dream

[1JEB]

Welshbeef said:

BigAlinEmbra said:

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Spot on, I think my deal is 1.99% above base.

RBS forecasts have UK down to 1% and US down to 0.25% over the next year. Unless you're really tight for cash, you might as well maintain your current rate of payment and try to bludgeon your mortgage down imo.

+1 keep overpaying. Maintain the level of monthly mortgage payment at the high BOE rates you'll save many years & tens of thousands of pounds in interest. There may be better investments to be made but you have made an investment in a house now pay the debt off asap. Live mortgage free live the dream

Whilst I agree that paying down debts is generally the best way to go, for most people I think it would be a better idea to set the money you "save" aside with a view to paying off the debt when the economy is slightly more secure. My reasoning is that spending all your money paying off debts leaves you in a pretty bad position if you loose your job - you have no buffer.

Debts should be paid down aggressively but only whilst you can maintain enough savings to tide your through a rainy day. All IMHO of course.

[scotal]

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Not all mortgages have a collar at 3%. Some do, some don't. HBOs will be the one to watch on this as their loans have an "optional" collar, i.e if the base rate drops low enough the bank can unilaterally collar them. Prior to their recent troubles, it is widely felt that HBOS would given the option, instigate that collar in the event of rates dropping below 3%. Now they have direct government interference sorry, ownership, its felt that HBOS will be under immense political pressure not to collar their rates.

Nationwide have a 2.75% collar which so far they have been non-comittal about, however they have just introduced a new mortgage with a current rate of 4.39% (I think) that is also collared at 4.39%. THey have also decided to limit access to their standard variable rate to new borrowers.

Another thing that will be interesting is if the banks who price their trackers off their internal base rate decide to make that base rate deviate from mirroring the BoE base. I.e the Boe drops rates to 2% and the bank holds its rates @3% (Their own base is not SVR or standard variable rate.)

[Bernie-the-bolt]

My HSBC mortgage is simply .29% above base regardless according to the paperwork.

[BigAlinEmbra]

1JEB said:

Welshbeef said:

BigAlinEmbra said:

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Spot on, I think my deal is 1.99% above base.

RBS forecasts have UK down to 1% and US down to 0.25% over the next year. Unless you're really tight for cash, you might as well maintain your current rate of payment and try to bludgeon your mortgage down imo.

+1 keep overpaying. Maintain the level of monthly mortgage payment at the high BOE rates you'll save many years & tens of thousands of pounds in interest. There may be better investments to be made but you have made an investment in a house now pay the debt off asap. Live mortgage free live the dream

Whilst I agree that paying down debts is generally the best way to go, for most people I think it would be a better idea to set the money you "save" aside with a view to paying off the debt when the economy is slightly more secure. My reasoning is that spending all your money paying off debts leaves you in a pretty bad position if you loose your job - you have no buffer.

Debts should be paid down aggressively but only whilst you can maintain enough savings to tide your through a rainy day. All IMHO of course.

Absolutely! I wasn't advocating bankrupting yourself trying to get the mortgage slimmed down!
Although dependent on your product overpaying may then result in the ability to have payment holidays which might be of use if you hit rocky times. Still best having a wee stash tucked away as well of course.

[Welshbeef]

1JEB said:

Welshbeef said:

BigAlinEmbra said:

Plotloss said:

Its been mentioned on here before that mortgage contracts have a minimum interest percentage in them of something like 3%

Spot on, I think my deal is 1.99% above base.

RBS forecasts have UK down to 1% and US down to 0.25% over the next year. Unless you're really tight for cash, you might as well maintain your current rate of payment and try to bludgeon your mortgage down imo.

+1 keep overpaying. Maintain the level of monthly mortgage payment at the high BOE rates you'll save many years & tens of thousands of pounds in interest. There may be better investments to be made but you have made an investment in a house now pay the debt off asap. Live mortgage free live the dream

Whilst I agree that paying down debts is generally the best way to go, for most people I think it would be a better idea to set the money you "save" aside with a view to paying off the debt when the economy is slightly more secure. My reasoning is that spending all your money paying off debts leaves you in a pretty bad position if you loose your job - you have no buffer.

Debts should be paid down aggressively but only whilst you can maintain enough savings to tide your through a rainy day. All IMHO of course.

Fair point - Actually may do this myself leave the cash funds available & earning interest so if the worst comes to the worst you have x months full mortgage payment in the bank.

[JustinP1]

Bernie-the-bolt said:

My HSBC mortgage is simply .29% above base regardless according to the paperwork.

Indeed.

My broker confirmed for me last week that there is no collar on my mortgage just a link to base rate.

I must be honest and say the size of the drop is a welcome relief I was not expecting, and I would feel pretty sick if I had pulled the trigger on a fixed rate deal when I switched at the end of last year.

[trooperiziz]

Welshbeef said:

Fair point - Actually may do this myself leave the cash funds available & earning interest so if the worst comes to the worst you have x months full mortgage payment in the bank.

Absolutely. I have a couple of loans to pay off before I start throwing money at the mortgage, and I actually have enough in the bank at the moment to pay off one of those in full plus a fair chunk of the other, but the money will be staying in my bank account for 2009 and i'll keep saving until things look a bit more stable. Sure, i'll pay a bit more in interest over the next year, but better that than being made redundant and having no cash in the bank...

[emicen]

JustinP1 said:

Bernie-the-bolt said:

My HSBC mortgage is simply .29% above base regardless according to the paperwork.

Indeed.

My broker confirmed for me last week that there is no collar on my mortgage just a link to base rate.

I must be honest and say the size of the drop is a welcome relief I was not expecting, and I would feel pretty sick if I had pulled the trigger on a fixed rate deal when I switched at the end of last year.

No mention of a collar in my mortgage documentation either. Simply states 0.59% above Bank of England base rate. (Abbey)

Regarding Japan: I believe typical lending rates over there have been ~2% for the ~0% period. Contrary to popular belief, their rate has not simply been 0 since their property crash. Its varied a bit but they vary their base rate in 0.05 increments rather than 0.25 increments as we tend to.

[scotal]

The FSA came out this morning and said the collars on HBOS loans may be unenforcable as they weren't included in the key features illustrations given to clients, therefore borrowers made decisions without having all the facts.

[M400 NBL]

Who thinks lenders will start to increase their salary multiple if the base rate hits 2% or less?

Or increase their LTV ratio? Perhaps LTV is only dependent on a lender's view of future property prices, but will any start taking risks first to encourage FTB'ers?

[Welshbeef]

So is common concensus that tomorrow it will be 75bp drop - or if the inflation figs they see are really bad it will be 150bp.

Does anyone see a 300bp drop now and then up it in 2009??