Interest Rates - How aware are new borrowers ?
Discussion
CzechItOut said:
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?
That suggests that all you have to to keep rates at 1% is to print money or borrow it. I'm not Keynes but the word 'unsustainable' comes to mind...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?
Simpo Two said:
That suggests that all you have to to keep rates at 1% is to print money or borrow it. I'm not Keynes but the word 'unsustainable' comes to mind...
Not at all, in fact, quite the opposite.In theory, printing/borrowing money should cause inflation, which would require interest rates rises. However, despite unprecedented government borrowing in the last decade inflation is at average levels.
Therefore, in the longer term, when the borrow taps are turned off, what is likely to cause inflation and therefore require interest rates to rise?
Piha said:
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.
Probably they know them, but don't realise the implications properly - or believe it will change. Just check the "I'll work until I die" crowd who seem to regard pensions as pointless/useless. In reality when they lose their job at 55 they'll struggle to get anything like a full time good paying job again due to their age. I don't know if many really realise the payments from a 1% rise to a 2% rise are going to double, whereas of course a 12% to 13% rise is a lot smaller in terms of increase. This is said as a 32yo, graduate from a decent university etc. Very few people I know talk about good financial planning etc. If there has been "investing" talk it basically revolved around bitcoin. 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.
I remember my first mortgage being somewhere around 13.5% , the next one was in the 14% range , both standard variable rate as the mortgage deals back then locked you in for a while and that didn't suit me .
I weathered those rates and did ok out of a few houses over the years due to basic hard work and doing without a lot of luxuries, to be honest, I'd consider giving a limb for the interest rates to rise back to those levels these days , if they did I could spend the interest I'd get on my savings on a new limb and have change to spare !
I weathered those rates and did ok out of a few houses over the years due to basic hard work and doing without a lot of luxuries, to be honest, I'd consider giving a limb for the interest rates to rise back to those levels these days , if they did I could spend the interest I'd get on my savings on a new limb and have change to spare !
Jon39 said:
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% !
Managed to pay off the mortgage in 10 years, and saved a fortune. Been mortgage free since 2001.
Back then I had no savings. Now that I do I get a crap rate!
R.
Simpo Two said:
That suggests that all you have to to keep rates at 1% is to print money or borrow it. I'm not Keynes but the word 'unsustainable' comes to mind...
Many aspects of the global (or is it western?) economies are unsustainable. Low interest rates are here to stay IMO barring any very very unusual factors ( run on the pound ? ). Uk has had its day. Where could growth possibly come from to drive up inflation ? Wages? Doubtful. It's a race to the bottom globally. Jon39 said:
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.
We still had to pay the mortgage in real, actual pounds on the day.
55palfers said:
Jon39 said:
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.
We still had to pay the mortgage in real, actual pounds on the day.
When I was having to pay 1500 I couldn't sell as the house was worth less than the mortgage !
I still cant get my head round why normal resi mortgages are not "lifetime" fixed rate.
So you borrow £300k today at 2% APR, the repayment is £1300 a month, over 25 years why do we fix an element of jeopardy into the system, and not fix that for the period of the loan?
If mortgage rates plummet from when the loan is made there is nothing to stop someone re-mortgaging but it would stop the, "what will we do if rates triple?"
So you borrow £300k today at 2% APR, the repayment is £1300 a month, over 25 years why do we fix an element of jeopardy into the system, and not fix that for the period of the loan?
If mortgage rates plummet from when the loan is made there is nothing to stop someone re-mortgaging but it would stop the, "what will we do if rates triple?"
nikaiyo2 said:
I still cant get my head round why normal resi mortgages are not "lifetime" fixed rate.
So you borrow £300k today at 2% APR, the repayment is £1300 a month, over 25 years why do we fix an element of jeopardy into the system, and not fix that for the period of the loan?
If mortgage rates plummet from when the loan is made there is nothing to stop someone re-mortgaging but it would stop the, "what will we do if rates triple?"
In the US, mortgages tend to be lifetime fixed rate, as you say. Internationally, the UK model of short fixed period followed by floating is more common.So you borrow £300k today at 2% APR, the repayment is £1300 a month, over 25 years why do we fix an element of jeopardy into the system, and not fix that for the period of the loan?
If mortgage rates plummet from when the loan is made there is nothing to stop someone re-mortgaging but it would stop the, "what will we do if rates triple?"
If consumers are free to remortgage when market rates fall, but banks are tied in when market rates rise, that is an asymmetry of risk that ultimately consumers will have to pay for.
Edited by webstercivet on Wednesday 19th February 13:56
Don't forget the effects of inflation.
At present rates are low and inflation is low. In the past rates were higher and inflation was higher.
It's unlikely we'll see high rates and low inflation at the same time. That's not the way the game works.
When inflation is higher the size of your loan is shrinking in real terms. The loan quite quickly becomes "more affordable" because salaries are increasing. Similarly, the borrower's equity % in their home is increasing.
At present rates are low and inflation is low. In the past rates were higher and inflation was higher.
It's unlikely we'll see high rates and low inflation at the same time. That's not the way the game works.
When inflation is higher the size of your loan is shrinking in real terms. The loan quite quickly becomes "more affordable" because salaries are increasing. Similarly, the borrower's equity % in their home is increasing.
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).
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%.
The government have discovered the economic miracle of historic low interest rates and Quantative Easing and I can't see interest rates going up significantly, at least not in the next ten years or so. Interest rates are currently 0.5%, so if they even went up to 1% it would mean they have doubled.
The majority of people I speak to seem to have a nice standard of living (Nice house, newish car, iPhone, holidays etc.), yet are living paycheque to paycheque. One guy I work with has £30k of credit card debt and has a lease on a BMW M140i and doesn't seem worried at all.
I try and save around 50% of my salary each month, and out of choice I drive a shed and have no real interest in owning the latest must have phone/laptop/tablet/car etc. However, it is clear the government hates money hoarders because they have pretty much made it pointless to have any savings as they are actually devaluing each month due to inflation being higher than any interest you might get.
The government have actually done a brilliant job of convincing people to get into debt and causing them to voluntarily sign up to legal slavery to pay off all this debt. Debt, which years ago was seen as an embarrassing situation to be in has now been rebranded as credit and having a good credit score so you can get more credit is seen as an aspirational thing.
As was mentioned earlier in this thread, it almost seems that people are resigned to working until they die, but the reality is nobody is going to want to employ you when you get into your 60s. I have just been into London today with work, I hardly saw anyone on the train much past 55, I can only think they had enough and jacked it in or get persuaded to resign at a certain age.
How are people going to be able to afford to live when they have no savings, loads of debt and can't get a job anymore? This literally keeps me up at night and reminds me why I save 50% despite the pathetic 1.3% interest I am getting.
I always believe the best thing to do is the opposite of what the majority of people are doing.
The majority of people I speak to seem to have a nice standard of living (Nice house, newish car, iPhone, holidays etc.), yet are living paycheque to paycheque. One guy I work with has £30k of credit card debt and has a lease on a BMW M140i and doesn't seem worried at all.
I try and save around 50% of my salary each month, and out of choice I drive a shed and have no real interest in owning the latest must have phone/laptop/tablet/car etc. However, it is clear the government hates money hoarders because they have pretty much made it pointless to have any savings as they are actually devaluing each month due to inflation being higher than any interest you might get.
The government have actually done a brilliant job of convincing people to get into debt and causing them to voluntarily sign up to legal slavery to pay off all this debt. Debt, which years ago was seen as an embarrassing situation to be in has now been rebranded as credit and having a good credit score so you can get more credit is seen as an aspirational thing.
As was mentioned earlier in this thread, it almost seems that people are resigned to working until they die, but the reality is nobody is going to want to employ you when you get into your 60s. I have just been into London today with work, I hardly saw anyone on the train much past 55, I can only think they had enough and jacked it in or get persuaded to resign at a certain age.
How are people going to be able to afford to live when they have no savings, loads of debt and can't get a job anymore? This literally keeps me up at night and reminds me why I save 50% despite the pathetic 1.3% interest I am getting.
I always believe the best thing to do is the opposite of what the majority of people are doing.
Joey Deacon said:
The government have actually done a brilliant job of convincing people to get into debt and causing them to voluntarily sign up to legal slavery to pay off all this debt. Debt, which years ago was seen as an embarrassing situation to be in has now been rebranded as credit and having a good credit score so you can get more credit is seen as an aspirational thing.
Sorry to quote only part of your post, but I think this is relevant.Do you agree with the argument that if the government aren't publicly borrowing money to juice the economy than private borrowing has to make up the shortfall?
Therefore, as the deficit comes down, private borrowing has to increase?
Joey Deacon said:
How are people going to be able to afford to live when they have no savings, loads of debt and can't get a job anymore? This literally keeps me up at night and reminds me why I save 50% despite the pathetic 1.3% interest I am getting.
I always believe the best thing to do is the opposite of what the majority of people are doing.
You likely need to stick a bunch in shares, as inflation is probably meaning that 1.4% is actually losing value. Of course you need some "oh sI always believe the best thing to do is the opposite of what the majority of people are doing.
t" money, but anything extra should probably be thrown in something that gives better returns than a completely safe savings account.I also am doing a better job of saving (partly I am lucky that I have a job which I did for enjoyment but also pays well) than most, but in reality we're likely to be taxed to pay for the others who didn't save. Or have means tested pensions etc to pay for them. It's unfair, but can't see any other way (no government is going to want lots of people out on the streets).
Joey Deacon said:
How are people going to be able to afford to live when they have no savings, loads of debt and can't get a job anymore? This literally keeps me up at night and reminds me why I save 50% despite the pathetic 1.3% interest I am getting.
I always believe the best thing to do is the opposite of what the majority of people are doing.
You need to invest if you want to stay ahead of inflation.I always believe the best thing to do is the opposite of what the majority of people are doing.
I wish I had realised this years ago but I guess it's never too late to start.
Plenty of threads on here on where to start.
Although the interest rate policies of last decade have been described, by a largely uncritical media, as 'ultra low interest rate / QE ' the actuality is far from benign.
Financial repression is a government policy where interest rates are deliberately held below the rate of inflation - the benefit to the government is that the real cost of borrowed money becomes negative. The best known example was after the second world war- the UK's savers had bought war bonds to fund the fighting of the war - successive post war governments allowed inflation to rise in order to 'inflate away' savers loans to the state. Bit of a kick in the teeth for patriotic savers - but then perhaps it could be justified in that the loss for many citizens was greater than mere money?
12 years ago, with the introduction of artificially low interest rates and QE, the State sunk to a new low. Financial Repression was introduced to bail out the Government's and the BoE's 'friends' in the city. All those corrupt and broken banks: Corporate Financial Repression.
How does this hurt the public?
It's the reason why the best rate of interest you get on your hard earned savings is 1/3 the rate of inflation. And why your employer's pension fund is in in deficit.
And why 'savers' have responded to 'financial coercion' by being pushed into risk assets in order to 'preserve' the real value of their savings.
And why you (or your children) have been unable to purchase a home of your/their own.
Corporate Financial Repression - privatising corporate profits after socialising corporate loses.
So now you know.
I believe now would be an appropriate time to consider the real losers under the ultra low interest rate / quantitative easing policies of the last decade. These losers include:
1) Savers receiving negative interest rates resulting in falling demand and people generally losing the savings habit, creating long term problems.
2) Savers being pushed into chasing yield ie purchasing risky assets and creating long term imbalances in the economy eg BTL housing/BITCOIN.
3) Businesses that have been forced into competing against zombie companies - viable businesses are, in effect, subsidising market failures.
4) Zombie companies being able to survive and prosper without innovation, resulting in declining productivity
5) Asset bubbles such as housing, particularly BTL, preventing younger people from purchasing their own property
6) High house prices, as a result of ultra low interest rates, help to buy etc distort personal financial planning. Home ownership is a form of pension in that it implies current deferment of spending in favour of some future benefit - something being denied to a whole generation.
7) The Global Financial Crisis was substantially a result of a poor regulatory regime - have we learned from this? No. Refer to the decline in car ownership where now most car sales are leases. The GFC of 2007-8 caused by credit excess is now being fought with credit excess...
8) Lose lending regimes have encouraged short term, high cost loans and a willingness/perceived necessity to live, day to day, relying on the oxymoron that is 'cheap credit'.
9) Undoubtedly the extended period of credit excess has impacted on some more than others
10) Artificially low interest rates have encouraged businesses to buy back shares, by diverting funds that should be invested (in the company) - artificially increasing share prices to the benefit of Directors.
11) The very banks that were market failures at the time of the GFC are now more powerful than ever. Profits have been privatised, losses socialised.
Financial repression is a government policy where interest rates are deliberately held below the rate of inflation - the benefit to the government is that the real cost of borrowed money becomes negative. The best known example was after the second world war- the UK's savers had bought war bonds to fund the fighting of the war - successive post war governments allowed inflation to rise in order to 'inflate away' savers loans to the state. Bit of a kick in the teeth for patriotic savers - but then perhaps it could be justified in that the loss for many citizens was greater than mere money?
12 years ago, with the introduction of artificially low interest rates and QE, the State sunk to a new low. Financial Repression was introduced to bail out the Government's and the BoE's 'friends' in the city. All those corrupt and broken banks: Corporate Financial Repression.
How does this hurt the public?
It's the reason why the best rate of interest you get on your hard earned savings is 1/3 the rate of inflation. And why your employer's pension fund is in in deficit.
And why 'savers' have responded to 'financial coercion' by being pushed into risk assets in order to 'preserve' the real value of their savings.
And why you (or your children) have been unable to purchase a home of your/their own.
Corporate Financial Repression - privatising corporate profits after socialising corporate loses.
So now you know.
I believe now would be an appropriate time to consider the real losers under the ultra low interest rate / quantitative easing policies of the last decade. These losers include:
1) Savers receiving negative interest rates resulting in falling demand and people generally losing the savings habit, creating long term problems.
2) Savers being pushed into chasing yield ie purchasing risky assets and creating long term imbalances in the economy eg BTL housing/BITCOIN.
3) Businesses that have been forced into competing against zombie companies - viable businesses are, in effect, subsidising market failures.
4) Zombie companies being able to survive and prosper without innovation, resulting in declining productivity
5) Asset bubbles such as housing, particularly BTL, preventing younger people from purchasing their own property
6) High house prices, as a result of ultra low interest rates, help to buy etc distort personal financial planning. Home ownership is a form of pension in that it implies current deferment of spending in favour of some future benefit - something being denied to a whole generation.
7) The Global Financial Crisis was substantially a result of a poor regulatory regime - have we learned from this? No. Refer to the decline in car ownership where now most car sales are leases. The GFC of 2007-8 caused by credit excess is now being fought with credit excess...
8) Lose lending regimes have encouraged short term, high cost loans and a willingness/perceived necessity to live, day to day, relying on the oxymoron that is 'cheap credit'.
9) Undoubtedly the extended period of credit excess has impacted on some more than others
10) Artificially low interest rates have encouraged businesses to buy back shares, by diverting funds that should be invested (in the company) - artificially increasing share prices to the benefit of Directors.
11) The very banks that were market failures at the time of the GFC are now more powerful than ever. Profits have been privatised, losses socialised.
I think if you look at rents vs mortages you might find that rates need to go up a lot for it to become unaffordable for buyers (in relation to rents)
Take the example of a £500k house in zone 3 or 4 in London
Assuming a couple have put down a 25% deposit, their mortgage is £400k
At currently mortgage rates (1.5%) they will be paying £500 interest only, or £1600 capital repayment
At 5% mortgage rates it's £1650 interest only and £2365 capital repayment
Thats gone up a lot right? Consider that rents for that house are probably between £1600 to £2000, so even in a really bad scenario like rates going up to 5%, it's still roughly the same as what people are paying to rent.
At 8% though it does get quite silly and unaffordable I would imagine.
Take the example of a £500k house in zone 3 or 4 in London
Assuming a couple have put down a 25% deposit, their mortgage is £400k
At currently mortgage rates (1.5%) they will be paying £500 interest only, or £1600 capital repayment
At 5% mortgage rates it's £1650 interest only and £2365 capital repayment
Thats gone up a lot right? Consider that rents for that house are probably between £1600 to £2000, so even in a really bad scenario like rates going up to 5%, it's still roughly the same as what people are paying to rent.
At 8% though it does get quite silly and unaffordable I would imagine.
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