Interest Rates - How aware are new borrowers ?

Interest Rates - How aware are new borrowers ?

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Jon39

Original Poster:

12,782 posts

142 months

Tuesday 18th February 2020
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How aware might post 2008 first time mortgage borrowers be, that the present low interest rates are far lower than historic levels ?
A return to historic norms, will increase their monthly payments considerably (obviously after the expiry of any fixed-term arrangements).

For the past 10 years, Bank of England base rates have been below 1%.

Mortgage borrowers, whose interest rates are roughly based on those set by the Bank of England, are enjoying the lowest interest rates since 1694.

The longer that these low rates continue, does it perhaps mean that borrowers consider them as normal and consequently may increase their borrowing ?

Is there trouble ahead ? The financial crash ten years ago was connected with high levels of borrowing, governments, corporate and personal. Debt levels now are even higher than they were in 2008.


Bank of England Base Rates.

In 1684 = 6%
During the 1960s = 5% to 8%.
During the 1970s = began 7%, mostly 11% to 12%, ended 17%.
During the 1980s = mostly above 10%.
During the 1990s = 13% falling to 5%.
In 2008/2009 = down from 5% to 0.5%.



bristolbaron

4,756 posts

211 months

Tuesday 18th February 2020
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I think people are aware it could happen, but see it as a problem to deal with when it does.
If rates suddenly jumped back to the 6%ish I’d been delighted with in 2008 I wouldn’t be quite so happy this time around!

Orchid1

877 posts

107 months

Tuesday 18th February 2020
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It definitely has the potential to cause problems. I think a lot of younger people (early to mid twenties) don't look at interest rates and instead just look at what the monthly payment is and don't expect it to change much.

I don't see interest rates shooting up any time soon though.

43034

2,963 posts

167 months

Tuesday 18th February 2020
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Personally, i'm very aware! But the fact I frequent this (and other finance forums) may mean i'm not your target demographic!

I bought my first house in Oct '17 and have a 2.1% fix. Looking on the calculator I am fine at 7% (don't the banks stress test to 5% or is that a myth?) Above that i'd have to tighten the belt on a sliding scale and 11% would mean I'd have no holidays or monthly savings, proper month to month living.

Beauties of not living in London/S.East perhaps?

Either way, hoping to get it paid off ASAP though

Wacky Racer

38,099 posts

246 months

Tuesday 18th February 2020
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They went up to 15% for a brief period around 1991.

Jasey_

4,823 posts

177 months

Tuesday 18th February 2020
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Wacky Racer said:
They went up to 15% for a brief period around 1991.
I was paying £1500 mortgage for a house I was getting £650 a month in rent.

Fun times !!

TT1138

738 posts

133 months

Tuesday 18th February 2020
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2018 buyer here, and very much in the bracket you’re talking about.

In all honesty I think most new buyers are absolutely at the limit of what they can afford, and wouldn’t be able to manage an interest rate rise. Couple that with needing to pay the help to buy money back and I think a lot of people would be in a very difficult situation.

I bought quite a lot under what I was able to borrow, on the basis that I like a safety margin. It means a smaller house, but could just about cope with a doubling of monthly mortgage payment if necessary.

However I suspect the Bank of England is well aware of the extent to which people are at the limit, and I can’t see the rates rising much (if at all).

nammynake

2,587 posts

172 months

Tuesday 18th February 2020
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There are strict affordability checks in place for new lending so customers should be able to absorb a rate rise up to circa 5% I believe...although there is nothing to stop them ramping up their unsecured borrowing and car finance the minute they have their mortgage approved. It’s a bubble but not a significant one in my opinion, and it’s just one of the economic factors that the Bank of England include in their annual stress tests for banks.

Nickbrapp

5,277 posts

129 months

Tuesday 18th February 2020
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You can’t get a mortgage until you’ve passed the stress test of increase of rates up to 8%.

Piha

7,150 posts

91 months

Tuesday 18th February 2020
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LOL @ all the grampy's on here thinking that anyone under 50 years old doesn't have the ability to work out and understand interest rates & repayments if interest rates return to levels last seen in the olden days!

laugh

AlienLifeForm

467 posts

70 months

Tuesday 18th February 2020
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The days of even moderate interest rates are well and truly over for the foreseeable future. Low interest rates are here to stay.

Jon39

Original Poster:

12,782 posts

142 months

Tuesday 18th February 2020
quotequote all

Wacky Racer said:
They went up to 15% for a brief period around 1991.

Yes, 16 September 1992, UK leaves the European Exchange Rate Mechanism. (ERM was a theoretical fantasy, it was never going to work.) Minimum Lending Rate was raised to 12%, and planned to be 15% (with effect from 17 September 1992; never implemented).

The 300 year record high seems to be 15 Novembrr 1979 when the increase was to 17%. Rates remained at that level for 7 months, then reduced to 16% !

There is of course always a rough link to price inflation. Although the current older generation had to pay high mortgage interest rates, they benefitted from high price inflation (provided your employer could afford inflationary pay increases). High inflation reduced the original capital value of the loan being repayed.



NickCQ

5,392 posts

95 months

Tuesday 18th February 2020
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It's OK, if base rates go up more than 50 bps I will write a complaint letter to the FOS saying that I was mis-sold the mortgage and get a full refund wink

jimmythingy

312 posts

61 months

Tuesday 18th February 2020
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I was talking about this the other day, we were trying to workout a rate that would a) give savers a decent low risk return and b) a rate that is correct for mortgage borrowing/ control house prices. I think 4% was our thinking but would that rate push people over the edge? What's the balance?

Jon39

Original Poster:

12,782 posts

142 months

Tuesday 18th February 2020
quotequote all

Piha said:
LOL @ all the grampy's on here thinking that anyone under 50 years old doesn't have the ability to work out and understand interest rates & repayments if interest rates return to levels last seen in the olden days!

laugh


Hilarious. - smile

However the topic point is, do you think such low interest rates are tempting people now to save less and borrow more ?

If a significant rate increase occurred, and economic shocks tend to arise suddenly and often for unexpected reasons, then would some, perhaps many borrowers be unable to service their loans ?


gangzoom

6,251 posts

214 months

Tuesday 18th February 2020
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Jon39 said:

How aware might post 2008 first time mortgage borrowers be, that the present low interest rates are far lower than historic levels ?
A return to historic norms, will increase their monthly payments considerably (obviously after the expiry of any fixed-term arrangements). ...............The longer that these low rates continue, does it perhaps mean that borrowers consider them as normal and consequently may increase their borrowing ?
I got my first mortgage in 2008, right a peak of the market literally a few months (may even be weeks) before the market crashed. For the last 10 years I've been having the same thoughts as you.

When we moved into our current house in 2017 I was 100% sure rates would go up, so we have been overpaying like mad to make sure we don't fall into the rate rise trap. As an result we have reduced out LTV from 70% to 54% in 3 years, and on track to be at 42% LTV by the time the initial 5 year fixed is up. If we were to keep on overpaying at the same rate we will be mortgage free by 2028 so within 10 years of buying the house.

BUT, we have decided this will be our 'final' family home, and as a result want to put our own mark on the house with quite a big renovation/up stairs extension GrandDesign style. Initially I thought we have to save up for another 5-10 years before we could afford to do it, but out Mortgage provider is offering 5 year additional borrowing fixed at 1.55%, and 7 year fixed of 1.78%.

Providing we can clear most of the additional borrowing within the fixed time window, we are essentially been given access to almost 'free' money given inflation is running at 2%. Its a totally mad world compared to 10 years ago. The key though is clearly you have to be confident you have the earning power to pay back the additional borrowing, therefore even if interest rates were to go flying up in 5-7 years time we will have cleared most of the debt so its not an issue, where as if you just keep on borrowing than you will be in for a massive S**T storm.

Equally if inflation was to go up after we sign up to a 7 year fixed, instead of overpaying the additional loan with an interest of 1.78%, we will just pump all the spare cash into an ISA/saving product with 4-5% interest (presuming savings account interest rates go up as well), and than just pay the debt off 1 day after exiting the fixed period.



Edited by gangzoom on Tuesday 18th February 21:30

brickwall

5,192 posts

209 months

Tuesday 18th February 2020
quotequote all
TT1138 said:
However I suspect the Bank of England is well aware of the extent to which people are at the limit, and I can’t see the rates rising much (if at all).
Very much this. There’s no doubt that if the BoE base rate went to 4% tomorrow then there’d be a material decline in the housing market, and a lot of borrowers would be forced to the wall. They don’t want that.

However, the BoE are also aware that house prices in general need to come down, and that in the medium term rates should look to return to normal levels.

Which gives rise to the implicit current policy - which seems to be to target house prices staying flat or declining slightly in nominal terms, let prices come down through inflation, and if it looks like things are heating up a bit then quickly add a small amount onto the base rate to cool it.

Of course they’re not optimising for house prices - they’re optimising for inflation. Right now the economy is slow and inflation is tracking at target, so no need to do anything huge.

Piha

7,150 posts

91 months

Tuesday 18th February 2020
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Jon39 said:

Piha said:
LOL @ all the grampy's on here thinking that anyone under 50 years old doesn't have the ability to work out and understand interest rates & repayments if interest rates return to levels last seen in the olden days!

laugh
Hilarious, but the topic point is, do you think such low interest rates are tempting people now to save less and borrow more ?

If a significant rate increase occurred, and economic shocks tend to arise suddenly and often for unexpected reasons, then would some, perhaps many borrowers be unable to service their loans ?
I think most people taking out a mortgage will be aware of historical interest rates and we are better informed than ever before. I recall the ERM debacle and the ensuing anxiety regarding interest rates, I recall many people the financial shock of their lives, I recall some couldn't afford the increased payments. However, many folk buckled down and got on with it, many reduced their spending, some got second jobs. Not many people went around a saying folk should have been more aware as interest rates had been around that level before.

If young folk keep putting off buying a house because rates might shoot up then society would be worse off IMO. Sometimes you need to remember the past but it is more important to focus on the future, grasp the opportunities that come your way and get on with your life.

Simpo Two

85,147 posts

264 months

Tuesday 18th February 2020
quotequote all
Jon39 said:
However the topic point is, do you think such low interest rates are tempting people now to save less and borrow more ?
My view is that whatever the interest rate, people only have so much disposable income pcm to spend. So they will spend it. The lower the interest rate the more they can borrow for that amount so the logical conclusion is that house prices go up to accommodate the difference. The cost of a house is not really relevant, the cost to service the loan to buy it, is.

Jon39 said:
If a significant rate increase occurred, and economic shocks tend to arise suddenly and often for unexpected reasons, then would some, perhaps many borrowers be unable to service their loans ?
Of course, just as surely as the sun comes up in the morning. I survived the 15% days, got the medal smile Many did not.

CzechItOut

2,154 posts

190 months

Tuesday 18th February 2020
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Here's a question. What if 1% interest rates is the new norm?

Given that we are 10 years on from the GFC and rates are still below 1% in most developed countries, hundreds of billions have been pumped into the economy via QE, Trump is borrowing $1 trillion per year to juice the US economy and inflation is no higher than the long term average, why would interest rates have to rise much higher than they are today?