Worried about interest rates

[Babaandbana]

We are first time buyers. We are buying under the 95% deposit scheme. Our mortgage will be £750 a month fixed for 5 years (which is the same as our rent). But I’m really worried in that time interest rates will rise and rise, and house prices might fall. Is now a good time to buy?

The mortgage illustration says that our mortgage could rise to £1,300 if after the fixed period the SVR is 9%. But we couldn’t afford to pay that. And if we end up in negative equity we couldn’t afford to sell.

So is buying just a bad idea?

I bought in 2014 and also worried like you. Low LTV and concern about rising interest rates. I’m glad i decided to buy as I’ve just had my property valued for sale st more than twice what j paid. If i had continued renting I wouldn't have the equity and thus deposit i have now to move up the ladder. In the long term property usually goes up. Just don’t buy if you plan on staying short term like < 5 years.

It is likely that mortgage rates will rise, but it seems incredibly unlikely that they'd go up to 9%.

Most people worry about this stuff when buying their first property (I did) but very few people do actually end up regretting it.

It is impossible to predict interest rate level in 5 years. Markets have already priced a 2% base rate by the end of this year, up from the current 0.75% in the U.K. With such a small deposit, any material fall would take the property in negative equity making it very expensive/impossible to remortgage, in that scenario you would revert to a standard variable rate potentially in the high single digit if base rates are around 3-4%. So it would be wise to only take this product if your household expect a income increase over the next few years in order to pay down and reduce LTV each year.

You need to consider a number of things:
9% is very unlikely.
What happens at 3% - how unaffordable is it then?
Will you earning potential go up or down in the near future - any plans for kids?

I personally wouldnt have taken that risk, we saved and saved for a bigger % deposit and had a bit of help from Bank of Mum and Dad.

Think about what youd do to cut corners or make more money if things go badly - second jobs for you both?
We also took an unofficial lodger to help us with paying the mortgage for the first 3 years.

Over the long term interest rates sit at around 5-6%. We’ve just had a log period of artificially low rates. Could you afford 6%? 6 isn’t unrealistic to expect and plan for.

If not then I’d think very carefully before you commit.

Are you buying a house you can actually afford or “over housing” due to Instagram culture etc (as in, only really need a 2 bed semi but going for 5 bed detached). First time buyers have high expectations nowadays so don’t be swept along by the type of house you think you should be living in.

If you can over pay for the £750 period you may be able to bring the ltv rate down, which will allow access to the better interest rates when the 5 years is up. You do of course need to think carefully, but if rates jumped to 9% I think many of us would be in trouble! The banks have to tell you what they consider to be the worst case scenario. Prices will probably continue to rise and rent is already very expensive so overall I would say go for it.

I understand your worry but is there a chance that your earning capacity could rise during that time. what we did is buy what we can afford then applied for higher paying jobs to help give us the wriggle room we need

@EmotionalEllie

It is likely that mortgage rates will rise, but it seems incredibly unlikely that they'd go up to 9%.

Most people worry about this stuff when buying their first property (I did) but very few people do actually end up regretting it.

Do some research on past interest rates, it may surprise you.

I had my first mortgage in the 1989, by 1990’s 10%-13% were normal rates.

Go for it but over pay the maximum you can afford while rates are low would be my advice.

I would go for it, but also do the following

• overpay what you can
• look for career progression

In reality as well remember that rents go up too, so if you stayed renting you would also be facing increasing costs.

Do some research on past interest rates, it may surprise you.

I had my first mortgage in the 1989, by 1990’s 10%-13% were normal rates.

It wouldn't surprise me at all, I know all about how high mortgage rates were in the eighties. Not least because people who bought back then like to mention it a lot

I still think a rise to 9% is unlikely these days. The culture around lending and house buying has changed a lot in thirty years and it would be a huge shift from where we are right now. As a PP said, a lot of people would be in trouble if mortgage rates rose to that level and I don't think there would be any political will to let that happen.

Obviously it's just my opinion though and none of us on this thread have a crystal ball...

Lots to think about - thank you.

We are buying a 3 bed semi so nothing extravagant or anything. We have 2 children so couldn’t really have any less space.

Our income should in theory go up as now we’ve had our children I can focus more on career progression. You never know though do you?

I don’t think we could afford overpayments for at least the first few years especially with costs of everything spiralling as they are.

Our deposit is tiny but it’s taken us a very long time to save this much and we’ve moved to a cheaper area to give us more chance to buy.

I think it’s either buy a house with a 5% deposit or stay renting forever.

If you've already got 2dc and not planning more, then you're in a good position as less likely for periods of low pay due to maternity leaves and childcare will be wraparound rather than nursery costs.

For the next 5 years, your payments are guaranteed, so not an issue. Rents are likely to increase in that time, so your mortgage payments could be lower than renting would be.

In 5 years, do you expect to have increased earnings? Promotions onnthe horizon, retraining, going back to FT if you are PT now? Even if that's not the plan, would it be an option if it needed to be?

On the other hand, do any of the DCs have signs of care needs that could make it hard for you both to be in ft employment?

How would payments look at 5%?

Ultimately, housing costs are likely to increase whether rented or owned - the 5 year fix gives you some time limited protection from that.

I think crack on and buy.

At least for 5 years you have certainty. That's far better than renters have.

I still think a rise to 9% is unlikely these days. The culture around lending and house buying has changed a lot in thirty years and it would be a huge shift from where we are right now. As a PP said, a lot of people would be in trouble if mortgage rates rose to that level and I don't think there would be any political will to let that happen

Lol!!! Inflation is already at 7%. That could easily hit double digits once the effect of higher fuel prices hits everything from food costs to materials. Once inflation really sets in the Bank of England will raise interest rates. I'm not saying they will get as high as 9% or 13%, but if they do or don't it's got nothing to do with the culture around lending and house buying.

And how on earth do you think the government will have the economic fire power to prevent it if interest rates start to go up?

Haven't done the maths but have always thought that anyone getting a mortgage should work out if they could still afford it if rates go up to 3/5/10% or whatever, bearing in mind the high rates of past years. If you couldn't afford that, then why not go for a smaller house/lower mortgage, and if it doesn't go up then you can save more for a future move.

Its difficult but over the next 10 years do you think you could do any over payments?

So if they do rise there is more of a cushion ?

How much short fall would there be in the £1350? It's much easier to find ways to come up with an extra £100 than it would be to try and find the whole £600. How much wriggle room is there in your budget? If you overpaid with any extra money then that would help

Can you afford to overpay something each month? So pay £1000 instead of £750 as a monthly £250 hedge against an interest rate rise in the future and you’ll see your debt decrease quicker and your LTV improve for your next remortgage.
I know all about the high interest rates of the eighties but if you just worry about what interest rates are going to do you’d never buy. I’ve been paying a mortgage for over 20 years and the worse interest rate I’ve ever had was 6% maybe in the early 2000’s and that wasn’t for long.

Is your mortgage interest only or repayment? If it’s repayment then in 5 years time you should have a better LTV, especially if house prices also keep going up which normally opens up better mortgage deals.

If interest rates were 3% or 5% in 5 years time could you afford it? With buying you also need to know how you’d afford unexpected maintenance bills- have you got any savings/contingency for this?

The good news is you’ve fixed for 5 years so make the most of that period of certainty. It’s hard at the moment but make sure you continue to build up some savings so you can be prepared for when you remortgage.

They have to tell you that rates could rise, they have in my lifetime (late 80's early 90's) I paid 6% on my first flat. If rates rise above 5% or so prices are likely to drop so negative equity my be a bigger concern for high ltv. I would consider if the house meets your expected needs for the next 10 years- any increase in rates and fall in prices is likely to reverse but can take a while, being stuck in a one bed flat in negative equity with 2 kids is not good (if you aren't moving negative equity doesn't matter really). Also consider how you could raise your income £500 a month or whatever? Working in a pub in the evening a couple of nights a week each? Overtime? A lodger? Remember it's short term not for ever. I took in a lodger myself

Interest rates will never get to the levels that they were in the 80s. The world has changed since then. Markets are global. Most of the inflation we are seeing is coming from the cost of imported essentials like fuel. Raising interest rates in the UK will do nothing to combat that.

Interest rates are expected to rise a bit over then couple of years, but then drop back down in 2024. Nobody can be certain what will happen, but you need to bare in mind that if interest rates do go up significantly, then rents will go up significantly too, as many landlords have buy to let mortgages. At least with a 5 year fixed rate mortgage you are protected from increases for 5 years.

Also your pay should increase over that period, particularly if inflation is high. Your house price is fixed at the time you bought the the house, and inflation will reduce the value of the debt. Rents on the other hand will keep pace with price rises.

Have you looked at fixing for 10 years? This may give you the piece of mind you are after

I read an article the other day that interest rates are to peak 2 - 2.5% in 2024 and then fall away again. Who knows if that is correct but I don’t think anyone is predicting interest rates like the 80’s.
Experts do get it wrong though. I clearly remember a mortgage expert on the radio telling everyone in spring 2008 to fix when rates were maybe 5%. By spring 2009 rates were 0.5% so anyone that took that advice would have been hugely out of pocket .
Lesson to me was experts have no clue about the future either so just trust your own judgement