To think interest rates can never rise substantially without destroying the economy?

[PatoPotato]

I see some posts saying people should be prepared for double digit interest rates that people used to face in the 1980s. Is this really a possibility though? I think we are such a different global economy that is unrecognisable to the 1980s. Inflation has risen to expect a 2 person household income, whereas I believe that in the 1980s there were far more women who stayed home.

I feel like if mortgage interest rates were to ever rise to a substantial amount, most people wouldn't be able to cope? AIBU to think mortgage interest rates of 10%+ are just not a possibility anymore in modern times?

I hope not!

We are still somewhat running on interest rates set during hte 2008 crash to not send everything into further chaos.

The tap will be turned off at some point and all it takes is one black swan moment to cause another recession.

Economics is not an exact science

I agree. There's a lot of personal and business debt out there and the economy would be utterly fucked even if interest rates rose even a couple of percent or so and we'd be pushed back into recession with business failures, job losses etc.

The interest rates people keep citing happened for a relatively short period nearly 30 years ago on relatively small amounts of debt. Long term fixed rate mortgages are a good indicator of what the experts predict for interest rates in general and these are around 2 to 3% for 5 to 10 years.

No I don’t think so. They’ve been 0% ish in Japan for something like 20 years now I believe?

We have an odd economy, low interest rates, house prices high relative to average incomes, large numbers on relatively low wages with low productivity.

I agree with you that significant interest rate rises though I don't think 10% would be the trigger, I read rises by 1% or more would cause massive defaults for high numbers of people on repayments as well as the significant numbers still on interest-only so the Bank of England will probably try hard to avoid whilst trying to manage their statutory duties to manage inflation.

The housing market seems screwed with larger numbers renting, the old escalator of people trading up looking broken. I know lots of people (usually those with savings and mortgages paid) think the answer is raising interest rates and clearing things out though I think the storms that would wash through the economy would impact on them more than we think.

I 'm not sure many have faith that the government has a strong handle on how we get from here to a happier steady state with 'normal' interest rates, a stable housing market with more affordable houses for first time buyers and people able to more easily to trade up if they want then trade down when older and more workers being paid more than minimum wage and able to afford a better quality of life.

In short, I agree with you, except that it won't take 10% rises to cause problems.

Some might think it would have been better to take a big bath like Ireland did after 2008 though I'm not sure it would have been compassionate to trigger the mass defaults and evictions that would have resulted. I've not looked in detail but hear that Ireland's economy is doing better though the social cost of the mass emigrations of the young would have been painful too.

No I don’t think so. They’ve been 0% ish in Japan for something like 20 years now I believe?

Most economists use Japan as a source of what can go wrong with QE and near negative interest rates, it isn't something I want to pass on to the future generations.

They have been struggling to get out of deflation for the past 2 decades.

Inflation was pretty much beaten down in the mid-90’s and has never really returned. That should give you some comfort.

Interest rates are linked with inflation as a measure of "growth". Everything about post war economics has been to chase "growth" - the concept of making the pie bigger so people get bigger slices. The only snag with that, is the planet (rather unreasonably, you have to admit ) refuses to get any bigger to accommodate this "growth". More people into the same size pie should be a simple enough sum for most people to have a crack at though.

Laminate, there are some goods and services that transform quality of life with less of possibly negative environmental impact compared with what was available previously.

Health care for most is better than that which was available to royalty years ago. Though I realise lots of people living longer might not be great though families are smaller on average so the picture might be a little mixed.

ICT services arguably improve quality of life compared with what was available twenty years ago (though I hate most social media), forgetting the impact of bitcoin mining for arguably no good effect.

I suppose sharing cars might have a reduction in impact compared with families having multiple cars sat around though the employment impacts will be horrific.

Better-insulated houses and solar PV/ground heat would be massively better than coal fired heating.

All that said, not disagreeing with the impact on the world of the world's population aspiring to the lifestyle and environmental impact of USA/Australia/Gulf States. I wouldn't want to draw up the drawbridge on the majority of the world wanting a better quality of life though.

BarbaraofSevillle
The interest rates people keep citing happened for a relatively short period nearly 30 years ago on relatively small amounts of debt.

It's pretty obvious you didn't have a mortgage back then. I did and it was devastating. You may call the mortgages small back then but they didn't seem that way at the time on salaries which were massively lower than today, nor was it for a short period of time. Have a look at the attached table of interest rates. www.economicshelp.org/wp-content/uploads/2009/04/historical-interest-rates-1800-2010.png

When I took out my mortgage it was 8 or 9% and then gradually increased to 15% - it was crippling and I could barely afford to eat. I ended up renting out my only bedroom and lived and slept in my living room during the highest rate.

Tell me you wouldn't have a problem paying that much more interest on your mortgage

No they didnt BarbaraofSeville. My mortgage effectively doubled. Added in the removal of MIRAS and the changes in married/single peoples tax allowances and it was tough

It would be worse impact now than in the 1980s. Wages have fallen since then in real terms, and more work is voluntary - completely unpaid. We already have enough struggling.

I think I agree OP. With house prices being what they are, I think a lot of people have stretched themselves considerably to be able to own and stop having to rent. Not the most sensible approach, but it happens.

It also worries me that 95% mortgages are coming back - I think I've even seen 100% mortgages advertised if your parents can act as a guarantor with their own house as collateral!

I think we'll be in a really scary situation if interested rates rise by even a few percent.

This is a total layman's opinion though.

@LaminateAnecdotes I agree - I think George Monbiot has written some great stuff on the subject. "Growth at all costs" is simply not sustainable - if you expect economic growth of 3% a year then output needs to double every 23 years!

@SilverySurfer: I'm with you. I remember my mortgage going up from 6% to 15% in a very short period of time. Absolutely crippling. House prices then dropped, leaving lots of us with negative equity.

And we were particularly vulnerable to interest rate changes because, like most people buying in the late 80s/early 90s, we were advised to take out endowment policies rather than the traditional repayment mortgages.

We also thought our endowment policy would pay off the interest and give us a lump sum at the end, but that's another story!

What bothers me about the current situation is, banks now charge about 4% above BoE base. Before the crash it was a smaller amount. Our mortgage was fixed in 2006 and went variable in 2009. We’d been paying about 5% fixed and the rates had gone up a bit and switching to variable it was going to be 6.5. We dragged our feet with fixing again and in that time the crash happened and the rate went down to 0.5%. This was really good for us because DH was made redundant and I had a pay cut (private sector cut pay right at the start of the downturn) so our mortgage was quite low. This is how it should be, because the whole point of linking to base was that they are an indicator of economic stability and would protect customers in a recession.

DP got another job and we had to move house to a more suitable one for DDs disability, but despite it only being worth 50k more, our mortgage payments almost doubled because new mortgages now were 4% above base rate. Banks decided people were ok paying 5% so that what they charged, and they could make far more money what way. Instead of making 0.5% profit they could make 3.5%. That’s why there have been so many issues with repossessions.

I’m wondering if, when interest rates rise, banks will reduce their cut and things will stay the same -ish for consumers, or if 4% above base is the new normal and in 10 years we’ll be paying 9% on a BoE base of 5%.

I think I've even seen 100% mortgages advertised if your parents can act as a guarantor with their own house as collateral!

This worked really well for us as my parents were able to buy a flat for when I was at uni. It meant I could study where I wanted to. They were cash poor(ish) at the time but they had an asset they could use to support me without having to sell. It was cheaper than renting accommodation as I shared with two others who’s rent covered the mortgage. Very low risk for my parents. Worst case scenario was if they couldn’t afford it, we would sell.

Ultra-low interest rates are a political necessity in order to maintain the
enormous housing and unsecured debt bubbles which have inflated over the last two decades.

The government & BOE know that any significant increase in rates would burst both bubbles and bring the whole economy crashing down.

Worst case scenario was if they couldn’t afford it, we would sell.
Surely worst case scenario is something happens causing recession, wages fall, redundancies rise,house prices tumble, no one wants to buy the flat, your parents can't keep up the payments, the mortgage provider repossesses?

The 4% over base rate quoted above seems somewhat inaccurate. We were FTB last year and have a 3 year fix at 2% on a 90% mortgage. Rates any higher than 2/2.5% were for those mortgages at over 4.5x joint income.

The government & BOE know that any significant increase in rates would burst both bubbles and bring the whole economy crashing down.

Knowing is not the same as caring.

Knowing is not the same as caring.

Not half. There are nearly 70 million people in the country: even with the best will in the world, some will benefit from such an event and the government's responsibility is to try and balance the needs of all. In practice of course, in Britain, they only listen to the needs of the most vocal, who are the richer and higher status people anyway. The rest of us have been cut out.

the government's responsibility is to try and balance the needs of all.

Is it ?

People may think that - people think all sorts of things.

However the reality - and actions - don't really make that case.

It ought to be, otherwise we get what we are seeing: huge parts of the population disenfranchised, with nothing to gain from helping to keep the system going. It's a recipe for violence, crime and socioeconomic breakdown, unless you use force or some other way to 'legitimise' the status quo, such as religion. In practice, I agree, it doesn't happen here - we're starting to see the use of PR and propaganda and other tools that fall into that second group of, in fact, 'other ways' . I think the sheer demographics don't help.