To ask you to explain 6% mortgages

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Maths is not my strong point, so grateful for any explanation of how higher mortgage rates work vs the value of a house I am looking to buy.

If mortgage interest rates are at 6% and are due to stay around this level for years, and house prices in my area are not rising by the same amount each year, effectively my house/mortgage is getting more expensive to pay for every year relative to the value of the house - wouldn't I be spending much more on the house than I'd aim to receive when it comes to selling it?
I know I'd be chipping away at the capital each year, but it still seems weird to me that mortgage interest rates are so high when the interest on easy access savings accounts etc. are at less than 6%. Basically my money would go less and less far each year.

Sorry if I've muddled things, please set me straight!

Potentially yes for that single purchase only. But you'll be building up equity and al other houses in your area would presumably also be not going up more than the interest rates and at some point you'll have paid off your mortgage and then will own a house and not have to pay a mortgage or rent.

So, completely ignoring the actual value of the house. MIL and FIL bought their house in 1975. They paid off the mortgage until 1995. It is now 2023 and they've not paid mortgage or rent for 28 years, eight years longer than they paid a mortgage for.

Essentially yes. It's much more expensive to borrow so you will be paying more to borrow the money to pay for your house and, no, it will not be increasing in value to compensate.

That's the current economy for you. We will all be a lot worse off.

The 6pc interest rate isn't the rate your mortgage increases each year, it is the % of the total loan amount you pay back as a lending cost in top of any repayments

So your mortgage doesn't get more expensive over time, excluding after a fixed period, but your house will still increase in value

But you won’t be giving money to a landlord to pay someone else’s mortgage so it’s still a good investment.

Borrowing rates are higher than savings rates, that's how banks make their profit.

So banks make money buy the difference in interest they charge for loans/mortgages and the interest they pay on savings accounts. That's why there is a difference.
Reshape your thinking a bit if you have a repayment mortgage every month you own a tiny little bit more of the property, but if you rent or have an interest only mortgage you only acquire the right to live in the property for that month.
We have become to used to being able to flip property quickly to make money really it is a long term investment the likelihood is that if you own the property for 10 years it will rise in value you will have a bigger deposit as you have gradually purchased more and more of the property by paying your mortgage and that enables you to buy somewhere bigger.
Over that time scale your wages are likely to rise so either the mortgage payment feels smaller as a percentage of your pay or you can increase your payments to pay the mortgage off faster.
Over the last 50 years investment in a property (mortgage) has risen faster than investment in a savings account.

I see posters have explained but the main reason to buy is to have a secure home.

Say you borrow 100,000
6% is 6000, you pay £1000 per month... so £500 is the interest, £500 on repayment
So the next year you only owe 94,000. So its only 5940 interst owed that year... so slightly more is paid of
Iver time, you repay slightly more capital each year.

Just to add a note of caution.
If house prices fall, then some people will end up in a position where the remaining capital amount outstanding on their mortgage is greater than the value of the house. This is negative equity where(your debt (mortgage) is higher than the value of your asset (your house).
Obviously the smaller the deposit that you put down, the higher the risk is of this happening.

Over that time scale your wages are likely to rise

wages for many have seen no growth for over a decade though in real terms

It does get more expensive over time. If you are paying more interest over the term of your mortage it is - of course - more expensive than if you are paying less interst. The capital amount doens't change (or the equity you have in the home, unless house prices fall loads), but the amount you pay back does which is what is important in real terms.

Also, I sometimes thing that the security of owning a hosue is overstated. You are essentially renting from the bank. If you can't pay you get kicked out. Sure, they can't boot your out on a whim, but that house is more the bank's than it is yours for most people.

Yes the 6% goes into the calculation at the beginning and what's spat out is the figure you need to pay per month, for the lifetime of the mortgage, to pay it off by the end of the term. Then whatever that figure is is what you pay for the term of your deal. In practice, especially when interest rates are higher, inflation means that your wages tend to increase whereas what you pay on your mortgage does not. It stays at "2023 prices" as it were. So over time your mortgage tends to get less in real terms as your wages increase (even if that's only "in real terms") and your mortgage doesn't.

In contrast rents tend to rise in line with wages, if not more so.

That's the current economy for you. We will all be a lot worse off.

I also think it's quite hard to accept that so much more money will be used to service debt because house prices are so high in the first place.

People say 5% are the historical average so a 25yr 350k mortgage at 4% would cost in total 550k vs paying that off at a rate of 1.5% which would be 419k. That's an extra 131k, more than a third of the value of the house.

Now we might not have interest rates averaging 4% over the next 25 yrs but who knows.

That's not how it works.

Say you borrow £100k at 6%. Your interest owed in year one will be £6000 (6% of the total owed), so if your monthly payment is £1000, half will pay off the interest and the rest will reduce your capital. At the start of year 2 your mortgage balance will be £94k, interest due that year will be £5640 (6% of the capital) - more of your monthly payment goes towards the capital.

If your monthly payment is £800 then you will only reduce the capital by £3600 (£300 x 12) in the first year so it will take longer to pay.

For older people who have lived through much higher rates (my neighbour remembers 15%) it’s not as worrying . Rates fluctuate and we have benefited massively by such low interest rates for so long we have been lulled in to a false sense of security. We are all told to borrow more and buy more and that’s what life is about. Hopefully the tide will turn a bit but imagine we will be stuck around 4% for a while in the future.

Apart from the 5940/5640 typo, you’ve just said exactly what she did 😂

The maths on this calculation will change throughout the lifetime of the mortgage and depending on the length of the mortgage but very roughly speaking:

house price at year 0 x 2 = total mortgage paid at year 25

So the value of the house will need to be double its current value at the end of the mortgage for it to be a sound investment. It used to be said that house prices doubled roughly every 7 years so it is odds on it double over 25.

Hello!
So the point is that you are using your money to purchase an asset. A mortgage is just a loan in which the bank finances your purchase of the property (or rather, part of it) and then eventually you pay that back.

Yes it’s now going to cost you more now to service that loan (which is going to be horrendous for a lot of us) but ultimately you own something once you’ve paid off that loan.

i am just about to remortgage after 5 years (the rate was 1.84 in 2018 vs 5.84 now - and I locked in early so it would be even higher now) and it’s going to cost me tens of thousands of pounds more to pay it off (I debated extending the term of the loan but decided we’d just cut back elsewhere). It’s going to be a grim few years I think.

Yes you have it exactly right. That's why it makes sense to overpay your mortgage as much as possible.

It might also help to remember that the debt is an assetfor the lender. The bank is making 6% per annum from your mortgage. That's how they earn a profit. That's also why they discourage you from overpayingthey want to keep that income coming!

At 6% a 25 year mortgage will cost just under 2 x the amount borrowed. Property at least in the SE has more than doubled over the last 25 years so you effectively get all your money back plus have somewhere to live. The alternative would be paying rent and not having the asset to sell at the end. A 40 year term will pay back 2.65 x the original borrowing (based on 6%) but sometimes it's the only way to make buying affordable.

@TinySaltLick is right - 6% isn't the amount your mortgage increases by each year, it's the annual cost of the loan. This means that you don't need the house price to increase by as much as 6% each year to end up making money on your house purchase.

However, you're right that if you're paying 6% interest on your mortgage you'll end up paying significantly more in total (as a £ amount) than if mortgage rates were lower.

But rents will also be higher (as landlords need to service their own mortgage payments) so there's no magic way not to pay the extra. It's just the reality of a high interest environment. Interest rates have been unusually low since 2010 but have often been at this level historically, it's just that we're not used to it.

In other words, it's probably still worth buying rather than renting if you can afford it.

I've no idea how that strikeout happened.

Long story short, it's still better than renting, and overpay that mortgage as aggressively as possible! (Watch out for overpayment limits and penalties of course.)

For older people who have lived through much higher rates (my neighbour remembers 15%) it’s not as worrying

Yes but as it's been said time & time again the amount matters. A high % of a lower amount isn't more than a lower % of a high amount...

we have benefited massively by such low interest rates for so long we have been lulled in to a false sense of security.

Who has benefited? Not FTBs trying to buy now.

There is often an assumption that rent is "dead money" but not that interest on a mortgage is also "dead money". Current high interest rates and house prices stalling mean buying a house is not necessarily better than renting in the current climate

Yes, there is a the possibility that the resale value of the house will be less than the sum total you have paid for it. That’s ok, you still have somewhere to live. No one expects a car or a washing machine to be worth more than they paid for it, but they are still happy to buy them as they are useful.