To ask you to explain 6% mortgages

[tokenname]

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!

It used to be said that house prices doubled roughly every 7 years so it is odds on it double over 25

I thought a lot of growth had slowed in recent years compared to prior gains eg huge growth in the 90s to the financial crisis & then not so much.

If you look at it just as a financial investment, that's true. It's partly why so many are getting out of buy to let.

But you need somewhere to live so you're comparing it to renting where you'll never own the asset, can't make significant changes to the property to suit you, will have to pay it forever and will never reach the point of having it paid off

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.

but property didn't double with 6% interest rates? Growth has slowed down, look at London flat prices since Brexit & covid. People need equity to move up the ladder generally.

I agree it's better then rent because rents are astronomical

I think you both said the same thing?

At least if you own your house/flat you have security and won’t have to move every six months, which is what happened to us when we were renting.

insecurity with renting is a big factor. If you can get social housing though If chose that option in this climate.

Looking at a short period of time since Brexit or Covid is not representative over the normal term of a mortgage. We have owned property for more than 25 years so have paid rates higher than 6% and much lower. We've seen people in negative equity and pricing booms - you have to take a long term view and not a small snapshot in time. I can safely say that a new build starter home, large new build family home (both SE) and flat in London have all at least doubled in value in the last 25 years or less and the average mortgage rate over that time isn't that far off 6% despite the 10 years of unusually low rates.

I don't really understand what you mean about it getting more expensive annually relative to the value of the house. Can you clarify what you think 6% interest means?

If it's capital and repayment the amount owed is smaller every year therefore the interest is smaller too.

There are lots of ways to look at this. Due to inflation my £750 payment is "worth" less than a year ago if I took it to the supermarket.

Interest rates 25 years ago were 7%.
Over the 25 years there will be times where interest rates are low and times when they are high. You will remortgage regularly, sometimes winning and sometimes losing
Then there will be times when house prices are rising, stagnant or falling.

Interest rates 25 years ago were 7%.

But I'm referring to the huge growth historically in prices between the 90s and 08. It was unprecedented in terms of prior of post periods. I think in that period they grew 150% plus

UK house prices have more than trebled since the start of the 21st century.

Looking at a short period of time since Brexit or Covid is not representative over the normal term of a mortgage.

Brexit was 7 yrs ago

"Surprising new figures released today by online portal Zoopla show that London flats, many of which don’t have any outdoor space, have seen no change in their average prices since 2016. This equates to a decline in real terms of 24 per cent."

so you think over the next 20 yrs those flats will double in real term value?

you have to take a long term view and not a small snapshot in time

I'm not disputing that, I've simply said I don't think the growth in the late 90s to the crash is representative of growth going forward. And I think todays climate of declining wage growth for many, higher than normal interest rates with todays house prices to salaries ratio is all a bit of an unknown. Yes I know 6% historically is normal but it's not normal to have the ratio of house prices vs salaries as we have now. Personally I see a long period of stagnation.

@MasterBeth yes but how was that growth broken down? that's my point....

I'm not arguing house prices aren't going to increase, I'm just saying I don't expect to see similar growth in real terms.

Yes but house prices / the amount borrowed was a lot less. There is a big difference between 6% on £40k and 6% on £300k!

There is a big difference between 6% on £40k and 6% on £300k!

exactly & it will impact in my view equity that is gained.

Im not quite sure i follow your point. There may well be a long period of stagnation or crash.

But there was a crash in the early 1990s of about 25% and the boom you are referring to is recovery after that crash. And then in 2008 there was another 'crash' which online says was 20% at its worst. But to be fair this is regional. My house didn't change value for 9 years rather than crashing.

So i can imagine a world where prices do double over 25 years and one where they dont. Its unknown.

@lovewoola it did used to be said prices doubled every 7 years and I agree it hasn’t over the last 14 years so my point was over 25 years it more than likely will.

In the NE we’ve barely seen any rises. I’m thankful that I’m not banking on my house being my sole retirement fund - that’s the next big financial issue to come about in the near future. I know of plenty of people who are banking on their gamble paying out.

Not to mention things that were much more accessible in the past; more social housing, miras, 100% mortgages, interest only mortgages criteria not as strict, cheaper rents.

@D20 Absolutely agree with you that many are banking on ever increasing prices to fund retirement etc.

There was definitely a fall during the financial crisis/credit crunch, but the recovery was then swift and steep. There aren't enough houses in the UK. Property proices will continue to reflect that unless we build an extraordinary number of new homes over the coming decades (Hint: we won't).

Lol! - it's the same thing ( apart from the typo) as someone else said. It was an example of how it works not necessarily with accurate figures. Just an example 😂😂

But there was a crash in the early 1990s of about 25% and the boom you are referring to is recovery after that crash.

my point is that specific boom was unprecedented in terms of house price growths & I don't expect to see that growth again.

So taking my parents house/road it was 40k in the mid 80s, by 2017 ish it was 1.6m, which is way more than doubling itself over that period. This has happened all over London & the SE.

Growth has slowed & its now approx 1.75m. Im just saying I don't think it will be 3.4m in 25 yrs time in real terms or that my house will be worth 1.6m Of course I could be wrong but think the market conditions as I already mentioned plus the ageing demographic will have an impact.

Yes, if you are looking to increase your money, buying with a mortgage is not a great way to invest right now.

If you need somewhere to live though, it is still generally better than renting.

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

I wish this would stop being pedalled out. When interest rates were this high, house prices relative to average income were significantly less. You can't compare.

OP, your understanding is correct. But if I'm going to spend £2k a month on my house, at least a mortgage is chipping away at owning the house, than £2k on rent.