Monday 25 April 2011

No time to fix a mortgage

A big decision in recent times for many people in the UK has been what to do about their mortgages. Rates have been so low for so long that over 70% of people are now on variable rates, myself included.

Yet the prospect of sharply higher rates has been in the offing for most of this year. With RPI inflation at over 4% rates in a normal economy would be expected to be around 6 or 7 percent; that for many people would mean a doubling or even trebling of their mortgage.

Now though one benefit of the sheer difficulty of tyring to keep the economy going whilst the debt is paid down is a strong likelihood that interest rates will be kept low in May. If this is the case they will likely stay low until people come back from their summer holidays in September - or maybe even October.

For those of us who have been agonising over whether to fix rates at a much higher level than the variable rates this is welcome new, as it gives another 6 month breather before real rates of interest need to be paid again.


Anonymous said...

I'd just gone to the HSBC to get the paperwork on a fixed mortgage for five years at 4.39%.. yet as you say the recent drop in inflation makes in unnecessary at the mo..

But what are the long term astructual issues associated with having interets rates too low? (apart form the savers getting screwed which we all know about)

Anonymous said...

Anon: "(apart form the savers getting screwed which we all know about)"

That's it! THE most important thing.

Savers get screwed, (1) they choose to or are forced to spend their savings rather than save, reducing the avaliablity of capital in the system.

Banks are screwed ( because of their own corrupt practices ) and are not lending into the economy, despite if you will believe it screams of agony & outrage from actual businesses.

The securitization monster is imploding which is partly why the banks are screwed and partly explains the corrupt practices banks have been indulging in.

No savings either at the end of that time, since all those folk who thought they could live on the interest on their capital will now have to run their capital holding down just to eat and heat.

Net net, no credit avaliable in the system for at least a decade and at the end of that system no capital formation for another decade.

In the mean time more banks to be nationalized.

Word Verification: dyine

formertory said...

I think as regards your last para, fixing now is likely to be cheaper than fixing when the signals about increases are clearer.

In general terms, my opinion (for what little it’s worth) is that the government – who naturally, have no influence at all over interest rates – will seek to conspire with the BoE to keep rates low for as long as possible. They’ll stay too low for too long and eventually they’ll have to rise faster and further than would otherwise have happened. Governments never were any good at managing things.

The reason is to keep the residential housing market protected from reality; rises in interest rates will be hard on countries whose homeowners are largely over-borrowed and who’re predominantly on Tracker rates to keep the pain as manageable as possible. An average-ish Tracker has gone from <1% + BoEBR in 2008 to >3%+BoEBR in 2011; for higher loan-to-value ratios, higher still.

If BoEBR went back to just 3.5%, mortgage rates would be back to 2008 levels. If BoEBR went back to 6% (unlikely, I know) mortgage rates would be 9 – 10% and there’d be blood in the streets. The government would have to be dealing with debt, tax rises, price rises, foreign wars and a housing market collapse; I doubt it’d survive it. People will ignore bad news as long as they believe their house is (at best) rocketing in value or (at worst) maintaining its value. With high LTVs, high personal gearing and high (variable) interest rates it might move us nearer to the 40% drop in house prices forecast by some. Which might not be a bad thing, seen with a long enough perspective.

Budgie said...

Of course the government sets the BoE bank rate. The last one did, by targeting CPI rather than RPI, and stuffing the committee. So does this one. Savers are a soft touch (according to this government and the last).

What this government fails to take into account is that people are fed up of being led into the ordure. The belief and trust (the consent) of the population is being lost. I have never known such cynicism about the establishment.

Electro-Kevin said...

Anon @ 11.59

The loss of savers is more than made up by silly fuckers like me in fixed rate mortgages with high redemption penalties.

Get a good flexible mortgage and over pay as much as you can.

Anonymous said...

EK: "The loss of savers is more than made up by silly fuckers like me in fixed rate mortgages with high redemption penalties."

That you are being exploited by the banks - well I'm sorry. But your misfortune doesn't really make up for the reaming that sober responsible solid savers are being exposed to courtesy of the banko -political cartel.

And the 'long term structural issues' will be a loss of capital to fund business in the next ten to twenty years.

Assumption 1. The housing ponzi scheme cannot be re-started.

Assumption 2. The demographic in the UK is such the population is being tipped toward the elder age range and this group will of necessity draw down their savings. As the younger age groups will find it harder to get work, and be taxed at higher rates, capital formation will be destroyed.

andrew said...

I think the correct and completely unhelpful message is that you should have got your mortgage - fixed or tracker - about 4 years ago.

That house prices will rise is a religious belief that is rather more widespread and strongly held than all religions combined in this country.

Unless we as a population have a lot less money, or decide to spend pay rises on something else, that belief will hold true over the long term

Lord Blagger said...

Assuming most float rate mortgages are either base rate + spread, or libor plus spread, what's the effect of rising base rates?

In my case, I'm on base rate + 75 bp.
I've had the mortgage a long time, I can actually take the hit.

For those on libor + spread, there is a big spread between base and libor. A 0.25% rise doesn't actually hit them too much.

I'm yet to be convinced that 0.25% on base rates actually achieves much anyway.

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

Anon @ 4.14

Was I not being sober and responsible in fixing my mortgage at a sensible rate on a sensible amount ?

It is gamblers who are being rewarded through the current arrangement.

I offer no judgment on what is right or wrong.

However. I'm pretty sure that Captain Mainwaring would not have approved.

People wisht to predict outcomes on trends since his time with regards to property.

I feel that he'd recognise this country even less than I do.

In view of this who knows what is going to happen ?

Anonymous said...

EK: "Was I not being sober and responsible in fixing my mortgage at a sensible rate on a sensible amount ?"

I don't know, 'if the cap fits', since I have no idea of your financial circumstances, I am happy to take your word for it.

Having been caught in my first government inspired property boom in the late '80s I have some experience of being a 'silly fucker' too, an experience that led me to be highly skeptical that the latest boom was one that would turn out differently. Even toward the end I was wavering, then I heard about 120% mortgage offered to my colleague by Northern Rock and other financial instruments of extortion for example 'negative amortization' loans.

Mortgage costing 3.5 times your first salary plus 2 times the second salary is too expensive and little more than another means by the banks to skin their 'customers' alive.

hovis said...

I am am getting sick to death about savers whining that they are so sensible and thrifty that their money is being stolen. Quite frankly b*llsh*t - there is no god given right that savings in a bank will earn interest enough to cover inflation (or more). To know this is happening and not take action but then whine is simply financial ignorance and incompetance. Take action put it somewhere that will grow in an inflationary enviroment. Yes the financial situation is a clusterf*ck but that does not excuse the whiners inaction.

Anonymous said...

Hovis: "I am am getting sick to death about savers whining that they are so sensible and thrifty that their money is being stolen."

Philosophically I am a free market capitalist, I object to political interference in the economy to slew the investment landscape in an attempt to bail out one group ( as it happens the usurious corrupt banking sector ) and protect them from their own stupidity at the expense of another group, who by and large haven't been quite so corrupt.

Hovis: ".. there is no god given right that savings .."

Correct. However, there is a name for the system that comes into existence when government and commerce become too intimately intertwined, fascism.

I am too am getting sick death of those fascists who under a pretense of capitalism are simply trying to lever their access to public funds.

Lord Blagger said...

The problem is the bank bailout is peanuts. 50 bn of losses.

Why's that peanuts?

Well, the civil servants are owed 1,300 billion, and there are no assets.

So who are the real rent seekers? The bust banks (the huge majority didn't), or the civil servants and politicians?

What's happened is that you've fallen for the con. Politicians want a bogey man to deflect from their debt fiasco.

About 6,800 billion in total.

Anonymous said...

Lord Blagger: "So who are the real rent seekers?"

No argument there. I'd like to see the state rolled back, it's why I am particularly disillusioned although not surprised with Cameron.

Lord Blagger: "What's happened is that you've fallen for the con"

Nope, in a capitalist system the risk should be shouldered by the capitalists, after all we're happy to take the rewards, not socialized among the general population.

Budgie said...

Hovis: "I am am getting sick to death about savers whining that they are so sensible and thrifty that their money is being stolen."

You don't explain why someone who saves money should have part of it stolen to pay off those in society (government, bankers, other citizens) who (over) borrow.

The government has no duty to provide me with a healthy return on my savings. It does have a duty, as the self appointed monopoly, of holding the value of its coinage stable. All governments for the last 100 years have failed to do that.

Lord Blagger said...

Nope, in a capitalist system the risk should be shouldered by the capitalists, after all we're happy to take the rewards, not socialized among the general population.


You still don't get it.

I agree - no socialisation of failures. Brown's solution to the failed retail banks. Quite why people keep going on about casino banks is very odd.

However, what you don't get is the scale.

6,800 billion of state debts.

Bank bailout 25 billion on Gordon's share trading (just like the gold),
and 25 billion expected losses on the guarantees. The later being so insignificant in the run of things, that the BoE puts it way past page 100 of their annual reports.

6,800 billion isn't the fault of the banks. It's the fault of civil servants and politicians.

So to drive it home,

why is 50 billion a major disaster but 6,800 trillion not a problem?

Anonymous said...

Lord Blagger: "You still don't get it."

On the contrary I do, they're doing it so we can too. Yea, fascism.

Lord Blagger: "Brown's solution to the failed retail banks"

A mite partisan there aren't we? Because the Tories have done damn all to rectify the situation.

The one thing they were clear on before the election - reducing the deficit, they have failed even to start. Indeed their projections for public spending is a net increase over the medium term.

Lord Blagger: "why is 50 billion a major disaster "

because as a solution to the problem of an over-leveraged banking sector it was entirely the wrong one.

It's the same solution used on British Steel, British Motor company, British Rail, the NCB. The outcome won't be any different. Bail bail ... Nationalize, fail.

We'd done a lot better and saved a lot of money if we'd just allowed them to fail two years ago. We'd probably be coming out of depression now instead of heading into one.