UK Interest/Mortgage Rates – WHO’S in control?

(89 Posts)
Isitmebut Sat 25-Jan-14 00:31:04

The Bank of England on ‘forward guidance’ had indicated that interest rates (the Base Rate) was unlikely to go up from it’s 0.50% all time low UNTIL the UK unemployment rate fell to 7.0%, a level not expected until 2016 – so the fall in unemployment to 7.1% this month, is causing interest rate confusion, but who actually controls the interest rates that matter e.g. 2,3,& 5 - year fixed rate mortgages?

The short answer is NOT the Bank of England, it is the capital markets, as it is the buying and selling of the major institutional investors e.g. global pension funds, in global government bonds like UK Gilts, that determines the interest rates on every maturity EXCEPT the very short dated Base Rate, in the 2, 3,5,7,10 and 30-year bond issues.

So why does this matter to the likes of 2 to 5-year (and beyond) Fixed Rate Mortgages?

It matters as the government bond yield curve from 2 to 30-years ESTABLISHES THE FLOOR on bank lending rates, as banks can rarely borrow cheaper from the capital markets than the better quality/rated government to fund themselves, and lend money on to businesses and consumers.

My point being, is that with the best will in the world, the BoE does not control commercial interest rates, IT IS THE UK GOVERNMENTS CREDIT WORTHINESS (AND EXPECTED FUTURE INFLATION RATES) THAT DETERMINES our interest rates, as it is that market perception that means there are MORE buyers than sellers of UK Gilts, which brings interest rates down.

So will the BoE raise the Base rate from 0,50% anytime soon? It is highly unlikely, but in the February inflation report, they are likely to publish new guidelines, possibly based on other economic data than the traditional inflation and more recently targetted unemployment, reports.

What we have to remember is that the Base Rate in ‘normal’ times can be 2 to 4% OVER the UK inflation rate, now well below 3%, so once the BoE believes that UK economic conditions is anything like normal, the Base Rate and 2 to 30-year UK Gilts will (relatively) substantially move UP in yields (interest rates), in turn driving bank Fixed Rate Mortgage rates higher.

Many fear that a knee jerk rise in interest rates will both choke off the economic recovery and cause a correction downward in home prices, but clearly as everyone expects interest rates to rise, the MORE businesses and home owners that lock in their borrowing costs for years ahead, the less the economic and house price fallout will be. In my opinion.

HoGo1 Sat 25-Jan-14 12:13:38

UK borrowing for homes is unusual in that most have variable rate or short-term fixed rates. Not so in Europe and US where most have a fixed rate for the duration of the mortgage.

I believe house prices are grossly overpriced. Had the BoE not slashed rates in 2008/09 and introduced quantitative easing then prices would have fallen spectacularly and caused further problems in the banking system.

Historically average house prices have been around 4 x average household income. Average house price = circa 160k. Average household income = 26k. Disparity is huge.

The can has been kicked down the road by low interest rates and quanititative easing. The eventual fallout will be spectacular. I don't buy into a recovery.

Unsolvable problems unless new energy sources can be achieved and/or redistribution of wealth and an overhaul in education to keep up with countries that are overtaking the UK at an alarming rate! State pensions and government liabilities for civil servant pensions are completely unsustainable. Healthcare and long-term care for elderly too. The trajectories are really scary.

I'm a big fan of David Blanchflower:

http://www.youtube.com/watch?v=pfIRSVnY1cU

zizzo Sat 25-Jan-14 12:20:39

I'm not spectacularly well-informed on this subject, as I only learned last night that the Government does not want interest rates to rise as that would increase the amount on their debt repayments to a completely unsustainable and unmanageable level.

The scale of Government and personal debt isn't mentioned much in the media anymore - but it's gotten far worse in the last few years.

HoGo1 Sat 25-Jan-14 14:20:26

I have worked in financial services for 24 years. I am just in the process of selling my business as I no longer believe in the system. The whole thing is unsustainable in its current form. Just my opinion of course wink

Isitmebut Sun 26-Jan-14 10:37:54

HoGo1…..House prices are where they are due to government policies, = supply and demand.

If a government is building 100,000 or so homes every years, decides for their own ‘social’ and electoral purposes to have Open Door Migration and we have between 1.5 to 2 million new citizens mainly locating where there is work - COMBINED with letting banks increase annual Mortgage lending from £21 billion in 1997 to £115 billion by end 2007 e.g. Northern Rock – that LACK of supply and INCREASED demand and mortgage money can only chase prices higher = a housing crisis.

Labour left just under 2 million needing social homes, but blew all the money on big, fat inefficient government, at both the national and local levels; the Public Sector Pension liabilities you alluded to, at the last figure I saw, was £1.2 trillion ON TOP OF THE NATIONAL DEBT, all to come out of future government annual budgets, £1.0 trillion UNFUNDED with no provisions made at all.

Increasing Public Sector employment from 5.2 million in 1997 to 6.1 million in 2010, did not help, especially those in highly paid Quangos.

Quantitative Easing (QE) by the Bank of England and similar measures were needed globally, and is around £200 billion here, but it is NOT on the governments balance sheet, it is on the Bank of Englands – to be REVERSED when the BoE sells the UK Gilts etc it bought from the markets, or gets paid back when the Gilts they bought mature. Meanwhile, and up to now, the BoE is making a several £billion profit each year on the coupon payments.

Clearly if the BoE dumped the QE Gilts it bought prematurely, it would drive UP UK Gilt yields, but that is unlikely to happen anytime soon.

The ONLY solution for Housing, is for this government to substantially do what the last didn’t, BUILD A LOT MORE HOMES, but Miliband telling the large builders he will tax their profits when THEY get in, wlll hardly encourage that.

The lack of energy provisions and duff UK education policies of Labour, despite all the money and 13-years to ensure both were world class is another national disgrace, but don’t get me started on that.

P.S. Re the socialist Danny Blanchflower, similar to Balls, he insisted back in 2010, that ‘more of the same’ spending on fat inefficient government was the only way to sustain growth and equally said that new Private Sector jobs could not replace them. Yet here we are, 1.4 million new private sector jobs, around 4 x more than Public Sector jobs lost – the man is therefore a proven socialist numpty, IMO.

HoGo1 Sun 26-Jan-14 11:48:11

House prices are where they are due to 'fast-track' mortgage underwriting! Borrowers (subject to lax criteria) with a 25% deposit were able to borrow from mainstream lenders without proof of income. This also enabled borrowers to buy second homes and buy-to-lets and to become highly geared. The inevitable fall-out from all of this will occur when interest rates rise. Along with institutional investors dumping low risk bonds at a rapid pace of knots.

Isitmebut Sun 26-Jan-14 14:25:18

HoGo1...so in your expert opinion, there was no 'supply' problem as every economic migrant here is currently sleeping in a huge tent City somewhere and that the huge bank lending increases - with 50% of mortgage loans pre crash being SECURITIZED, along a similar model to the U.S. Sub prime lending - did NOT cause home prices to go from an average of £73,000 in 1997 to £232,000 early in 2008?

As for bond markets, they 'discount' potential bad news (hence the large recent volatility in UK Gilt yields) and as long as most people Fix their rates BEFORE they rise significantly, a housing crash, with huge current demand to take up selling/default slack, will NOT happen. IMO.

Isitmebut Sun 26-Jan-14 14:26:49

zizzo…..re personal and national debt, you are right, there are serious issues here, but we need to get it all into perspective, as these problems have built up over the past 17-years – through the UK boom and bust – and are not solves easily, or painlessly.

Interestingly enough, and I refer back to my opening post, it is THE PLAN to address these issues that has THE major influences on international fund manager buying and selling our government bonds over the long term. In other words, addressing our annual budget and national debt, heavily resulting from bad and wasteful policies, SERIOUSLY AFFECT OUR INTEREST RATES, both government and personal.

Household debt (as a percentage of income) rose from 97% in 1997 to 152% in 2010, with the Savings Rate in this debt and consumption environment, of course was sent crashing – and as in most countries Consumption makes up about 65 to 70 odd % of GDP growth, on average consumers were ‘maxed out’ and the recession would grow faster from then on.

Government spending/debt was an equally sad economic story, as Labour to help get elected in 1997, promised to stick to Conservative spending plans for the first parliament in order to reduce our Annual Budget Deficit (from the western recession in the early 1990’s), which they did, so by 2002/3, our Annual Budget of what this country spent/produced, virtually balanced.

The problem was after 2002/3, instead of paying off our National Debt, Brown went on a huge spending spree, borrowing £30 billion to 40 billion EACH YEAR, to pay for their extra spending, until the crash – when an UNBALANCED economy built on consumer borrowing/debt and huge increases in fat government and benefit spending that should have been REDUCED in the good times, that also relied of £60--£100 billion City profits and a dwindling Private Sector e.g. manufacturing, to pay MOST of the UK’s bills – caused the whole economic house of cards to fall down spectacularly.

The result by 2010, was an already UNBALANCED economy having less tax receipts, but fat government expenditure remaining and new unemployment claims .

So the UK spending around £158 billion a year than we brought in, was then INCREASING the cumulative National Debt by that Annual Budget Deficit figure, with both Labour and the opposition parties projecting a Nation Debt figure by 2015 of AT LEAST £1,500,000,000,000 (£1.5 trillion).

Finally, as you mentioned, the service charge of our National Debt is a national concern, as it is currently over £50 billion a year, THANKS to the plan that has reduced our Annual Budget Deficit, currently by a third to closer to £100 billion, as the government is rebalancing the economy.

In summary as long as the international investors continue to TRUST the UKs plan to reduce it’s debts, our interest rates – as defined by the government bonds in the 2 to 30 year maturities mentioned within my opening post - will remain much lower,than if those investors currently funding our Annual Deficit, didn’t, both now and in 2015.

noddyholder Mon 27-Jan-14 14:43:47

It is NOT a recovery if even .25% interest rate rise would halt it.

Isitmebut Mon 27-Jan-14 15:32:49

Noddyholder…versus the alternative, as the economic recovery is taxpaying Private Sector led, it is on fairly firm ground, especially as so much has been done by the coalition to encourage business/hiring growth and confidence in the economy is now returning.

So my opinion, as I allude to with HoGo1 is that there COULD be small increases in the Base Rates fairly soon, without affecting growth too much, as the majority of borrowers knowing what is coming, will fix their rates before it does.

The UK Gilt bond market has been very volatile in relative terms, as when I looked at yields the other day, the UK Gilt 5-year offered a return of 1.69%, and the benchmark Gilt 10-year offered an investor return of 2.78% - but both maturities had been around 0.75% higher recently.

Now three quarters of 1 % may not seem much to many of us who had paid 7 -10% mortgage rates - but when talking about bond yields above and below 2%, those are serious percentage moves – but who noticed in their everyday lives?

Isitmebut Mon 27-Jan-14 17:35:41

P.S With inflation having been over 3% and those current Uk Government Bond yields e.g. 5-years at 1.69% (a substantial 'real' term investment loss for risking money for 5-years) - is there any wonder property prices have also seen upward pressure by investor Buy to Let buying interest, for income?

A moribund house market where no one can move due to lack of lending would suit no one, especially those that need to move for financial or demographic reasons.

noddyholder Mon 27-Jan-14 17:52:30

People moved before ridiculous rates.

Isitmebut Tue 28-Jan-14 11:35:09

But they couldn’t all move when mortgage lending dried up from early 2008, and the home price averages for the UK fell around 25%, on very little volume, and bounced back with very little volume, compared with pre late 2007 crash transactions numbers.

Countries like Spain Ireland and Dubai saw home prices fall over 50% and stay there for years BECAUSE they had built excess homes supply, whereas we had had the largest influx of new European citizens over such a few number of years since 1066 - but the UK had not increased home building above normal domestic demand, before, during, or immediately after, as the governments spending focus was elsewhere.

When the government helped out, the UK banks still writing off £billions in commercial and retail lending/mortgages each quarter AND being told to shrink their balance sheets so ‘not too big to fail’, was NOT meeting healthy mortgage demand during the recession, where risks were far higher than when the bank lending that got them into such a mess in the decade to 2007, was granted.

So I reiterate my earlier points, we have a supply crisis, within a supply and demand housing equation, and throwing around huge promises of new homes to be provided whilst peeing off the large building companies if they dare make a profit after years of stagnation, is disingenuous at best.

Isitmebut Mon 10-Feb-14 15:32:59

The following chart plotting the movements in the Halifax Home Price Index and the Royal Institute of Chartered Surveyors (Rics) survey, shows a potential trend in home prices.
www.telegraph.co.uk/finance/personalfinance/houseprices/10621722/House-prices-the-chart-that-hints-at-leap-in-values.html

An indication by no means cast in stone, shows that the Rics survey has been a fairly accurate Leading Indicator to the direction on home prices, although some of the more wild ‘spikes’ (like the current one) did not fully translate to similar price moves – but at least the property market looks underpinned, as economic confidence returns.

Although the numbers of transaction figures are still way below the pre crash levels, it does appear that the price moves are becoming broader based across the regions.

PigletJohn Mon 17-Feb-14 00:25:40

isitmebut

You obviously feel strongly ABOUT this, but YOUR posts WILL be easier TO READ if you are more sparing with the EMPHASIS.

Isitmebut Mon 03-Mar-14 16:43:44

The Russian-Ukraine situation reminds us once again that ‘political risk’ is a far more influential factor on what Fixed Rate mortgages cost us, than the Base Rate, as volatility in UK government bond prices/yields that generally set the interest rate floor in the rates we pay.

Back in 2010 before the general Election our interest rates were much higher as the markets ‘price in’ the risk of both the ‘known, knowns’ and the ‘known, unknowns’ ; where the markets were unsettled that the UK government of the time were in annual budget deficit denial and it was likely the UK would have the first coalition for several decades, but had no idea of the composition or ability of the party’s to work together for the national good.

As it was it turned out ok, the 10-year bond fell in yield over time from just over 5%, down to a 1.50% to 2% range.

To emphasise the ability of government bond yields to move independent of our Base Rate, until last Friday, our 5 and 10-year government bond interest rates had risen over the past by approximately 7/8ths of a point.

The problem is with this kind of volatility as we approach actual base rate rises is the Housing Market is still not as healthy as we want it to be, as various regions still have homes underwater in PRICE, via negative equity.

www.bbc.co.uk/news/business-26389009

“Nearly half a million UK households are still in negative equity - meaning their homes are worth less than the mortgages on them, figures show.”

And although the housing market looks relatively underpinned by confidence returning on the breaking of the lending log jam, stronger economy and falling unemployment levels, apart from the certainty of higher Base Rates, possibly as early as this November (as rises/falls tend to be at the same time as the BoE quarterly inflation report) we have further headwinds as the new lending regulations come in, as this report mentions.

www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10668117/Mortgage-drought-could-kill-housing-recovery-stone-dead-next-month.html

“Tens of thousands of borrowers could be turned down for mortgages this summer because they are deemed to spend too much on pets, eating out or other luxuries and might have to cut back if interest rates jumped, a banking chief has warned.”

“Almost a third of borrowers who would be approved for a mortgage today could be rejected by lenders when onerous “affordability” rules are imposed by the regulator in April, according to the boss of Ipswich Building Society”.

“This would mean that from April-July, 67,000 mortgage applications are rejected.”

Clearly if we had seen better/tighter Home lending regulations in 2007, when Mortgage lending at £115 billion was several times that of the decade before, we might not have seen such a home price boom when most of those currently in negative equity were caught out – but why does it seem that in finance things get left too late and there is an over shoot on the upside, and then they over compensate of the remedy after the event, when it’s both too late possibly damaging to the market e.g. as interest rates are set to rise.

MoreBeta Mon 03-Mar-14 16:55:38

Short term interest rates are controlled by Bank of England and longer term rates by the money market and especially the interest rate swap market.

However, even if interest rates don't go up the interest rate margin ('spread') over Base Rate or the swap rate for mortgages will increase next year as banks charge a higher premium for mortgages. They will do this for two reasons:

1. Banks will be constrained in the amount of lending they can make by tighter controls on capital; and

2. Banks will charge more as defaults start to rise again as we dip back into a recession.

Mortgage rates could rise even if the general level of interest rates stayed the same. The Government and Bank of England cannot control the margin ('spread') over Base Rate and swap rates that bansk decide to charge.

Given how low rates are any increase in mortgage rates could feel quite substantial to many people who are very cash strapped with flat or falling wages even if it was just a 1% interest rate increase.

Isitmebut Mon 03-Mar-14 21:49:51

MoreBeta….you are emphasising my original point, that when everyone in the media were talking about ‘interest rates rising in 2015, probably after the election’, they are talking about the Base Rate, not the markets rates that drive Fixed Rate Mortgage offers.

I didn’t get into bank margins over the government yield curve yet as there are too many factors that could narrow or widen bank margins to currently predict them 1-2 years out, hence talking about the government yield curve as a ‘floor’ on mortgage rate offers.

Where I disagree with you is on the prospects of another recession anytime soon, as even if Labour form the next administration in May 2015, the current restructuring and trending breadth of the economy means it would take them a few years of tax rises, public spending growth and anti business measures to screw it up again.

As to mortgage default rates rising, as relatively small hikes in interest rates causes repayment pain and volatile bank Swap Rates/margins, despite tighter capital, as the interbank market repairs itself, bank credit lines to each other increase, leading to more cross country Swap financing AND the Securitised Mortgage Market reopens as investor appetite returns – such is the pent up Home demand, limited supply and increased availability of mortgages (as bank competition between each other for market share increases), unfortunately Housing is a slow burning one-way-bet again.

Yes the BoE now has the powers to intervene in Home finance to take the threat of a ‘bubble’ away, but similar to post 1990 financial crash in Japan, the BoE expects both inflation and interest rates to remain low for years ahead, which combined with ‘real’ earnings grow as the economy improves, means it will have it’s work cut out to stop that bubble revisiting.

Isitmebut Tue 18-Mar-14 15:08:40

Regarding the £2 million Mansion Tax.

Like all wealth taxes they look good on paper, but has anyone thought through the obvious repercussions?

Usually wealth tax raising projections are wildly optimistic, as funny old world, wealthy people have ‘choices’ on tax ‘planning’ or where they keep their money – but the problem is here, how many people now have d in £2 million homes in regions like the South and South East, are asset (home) wealthy, but income and or liquid asset poor e.g. pensioners?

So what we may say, anyone worth £2 million in assets should be taxed, ‘cos we can tell them to’, say Labour and the Lib Dems –so what happens when they SELL UP, and move down in both size and price?

Firstly the percentage of foreign buyers paying up to £2 million homes is such that in MOST of these homes, depending on the region, there should not be a downward correction in prices – but where there is NOT foreign demand, prices could tumble and in the future homes approaching £2 million will be dumped.

The PROBLEM therefore will be a COMPRESSION in the demand for mid ranged family homes, as those looking to move UP the family home ladder, are then competing for those homes with those moving DOWN the property ladder for tax reasons – a problem that can only get worse as INFLATION increases the amounts of homes approaching the £2 million level – and more families then move further OUT, compressing those markets/prices as well.

Just a thought.

AgaPanthers Tue 18-Mar-14 15:32:55

A sliding tax would work there. Doesn't need to be an abrupt £2 million-or-nothing, you could taper it up.

Isitmebut Tue 18-Mar-14 16:13:20

For anyone who may have paid taxes all their lives, bought a home 20-odd years ago and living on a pension that may seem adequate now (as can't rely on any savings that earn diddly squat in interest) - any tax would seem unfair.

I don't care about the foreign buyers second/third/fourth etc home investments, Osbourne has I believed already ensured they have to pay full (and higher) Stamp Duty on purchases, a Capital Gains Tax on profits and heaven knows what else - but I can't see why we should force people to pay more tax just because they have stayed put for years - that will cause moving problems further down the housing ladder.

Isitmebut Tue 18-Mar-14 16:15:40

When governments play with markets, prices always get distorted and the wrong people usually end up paying through the nostrils. IMO.

AgaPanthers Tue 18-Mar-14 16:17:35

But if you introduced these taxes it would reduce capital values. So ordinary houses would no longer be worth millions. That wouldn't harm the people who had paid taxes all their lives after all.

Clearly something is wrong if these houses were bought by normal working people and are now only accessible to foreign despots.

Isitmebut Tue 18-Mar-14 18:05:47

AgaPanthers….as I mentioned further above, ‘the problem’ is the sharp increase in population / lack of homes and until that is addressed, home prices will rise above inflation.

Lets look at this another way, due to existing taxes, who could buy expensive homes other than ultra wealthy foreign buyers – as I believe Home Stamp Duty is give or take a £1 or two as follows;
£250-500k taxed at 3%
£500-£1 mil taxed at 4%
£1mil to £2mil taxed at 5%
And the £2 million upward Mansion Tax level at 7%.

So those forced to sell a £2 million home, need someone who can pay the government an extra £140,000 (at least) in Stamp Tax, for the ‘privilege’ of then getting slapped with extra wealth taxes.

How many UK people can do that, so IMO a Mansion Tax on those that cannot afford it can only have negative social consequences – forced on those home owners by governments trying to socially engineer the property markets, often for populist electoral reasons, which over time could filter down the price bands as a nice revenue earner - as the Stamp Tax has filtered up and up from the flat 1% in 1997.

Buyers of say a £ 510k home may justify to themselves paying over £20k in Stamp Tax in an up market as ‘they’ll get it back’ when they sell within the price, but in a flat or down market, taxes on property can kill the market activity, not helping those who HAVE to move. IMO.

AgaPanthers Tue 18-Mar-14 18:10:28

Well yes, Isitmebut, the issue is there should not be so many £2 million homes.

Take this for example
www.rightmove.co.uk/property-for-sale/property-43340014.html

It's only through a distorted, undertaxed market (in global terms), that such a relatively modest pile of brciks can attract such valuations.

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