5% mortgage rates

[SaturdayGiraffe]

Just read this article saying to expect 5%+ rates shortly.

https://www.theguardian.com/business/2023/may/25/uk-homeowners-and-first-time-buyers-warned-to-brace-for-5-plus-mortgage-rates

UK homeowners and first-time buyers warned to brace for 5%-plus mortgage rates

I just don’t know how people are going to cope, and it could go even higher.

To be honest, anybody with a mortgage should be cutting back whether you need to or not.

I don't want to cut back, I've been striving for this lifestyle for a long time, I opted to go for promotion sooner than anticipated in order to cushion the blow that's coming. DH is on track to do the same too. It is a bitter pill to swallow realising how much better off we would have been on our current incomes 3 years ago.

I disagree. Hammering a small proportion of the population with high interest rates isn't going to bring inflation down. Even the BoE former adviser has said that the latest rises are nonsensical.

I don’t propose to be an expert here, but from what I can see if you don’t cut back and you don’t get your spending under control and your promotion and your DH’s promotion will just basically be swallowed up anyway. So you either save it for the longer term and your future self will thank you. Otherwise its gonna disappear anyway.
That seems to be how the wise people played it in the 70s.

Interest rates are what all borrowers pay and mortgagees are a peripheral aspect of the overall market. Base rates must exceed inflation for markets to access funds, or credit will flow to more competitive options. The anomaly is in the negative rates engineered in the recent past, which has to be corrected.

What else can the BOE do to reduce inflation ?

Their remit is to keep it at 2%, and interest rate rises are the only policy tool they have.

This to me. The sensible thing to do is always to cut back to give yourself some contingency.

This is exactly how increasing rates curbs inflation.

If you go against the trend increasing your debt into rising rates, then you take your chances because ultimately no one knows how high rates are going to have to go to stop inflation.

We are where we are now except that now I think as people are getting older more have repaid a mortgage than have one so the ability to affect the market via the tool of interest rates is a bit less effective

When you combine them with the majority who have fixed rate mortgages, it make it a lot less effective.

@GasPanic

Former BoE advisor said that they need to wait it out. Raising them further is going to put a tiny number of people who are currently remortgaging in extreme difficulty, and have no additional impact on inflation because most people are on fixed rates.

The bank needs to wait for people to come off their current fixes in order to see the impact of the interest rate rises that they have already made. Raising them further at the moment makes non sense, the bank are just appearing desperate.

He also said that it makes sense for the US to raise rates because they have a different types of inflation which is driven by consumer demand. This isn't the case in the UK. Inflation will eventually burn itself out.

Well they are wrong.

Maybe that's why they are an advisor now. There's always someone out there calling for the exact opposite of what the government is doing, safe in the knowledge that we're never going to find out whether they were right or not because the government are not going to do it.

Interest rates affect the whole economy, not just mortgages. That's business loans and unsecured debt like car loans as well.

And it's not just about people making the transition to higher rates from an expiring fix, it's about how people take action to curb their spending in the face of a fix expiry that may be months ahead, and how they reduce spending to afford it.

There are always a lot of VIs out their that have gone risk on and loaded up on property and are now desperately calling for lower rates to be bailed out.

Not mine, nor is it the BOEs problem. The BOEs problem is to manage inflation by the one tool they have in their toolbox - interest rate rises. 10 year gilts have taken a big spike today, ahead of where they were during the Truss "accident". If someone thinks the BOE is going to bail out a few BTLs at the expense of massively pushing up government borrowing costs then they are living in a dreamworld. The government prefers not to piss people off if it can avoid it, but there are bigger factors at play here.

Actually one more point I would make, is that even if the BOE stopped raising rates, I doubt very much mortgage rates will come down in the short to medium term. In fact probably the opposite.

If mortgage holders want bailing out that has to be done via fiscal intervention by the government (fiscal intervation that would drive inflation higher, and therefore up the cost of borrowing but never mind!)

Rock meets (very) hard place.

I have to agree with the advisor here. Let’s say I have a 1.5% mortgage and my fix expires in 2 months and I expect it to go up to 6%. My spending power would be significantly reduced when I get the new mortgage, but increasing it to 7-8-9% or whatever is just going to be financially ruinous. It seems the rates are just being increased out of panic and impatience by the looks of things.

You are right though that people should be reducing their spending ahead of their fix changing but the reality is people either don’t know the impact until they get that shocking new rate quotes to them or just don’t change habits until they absolutely have to.

I am in the fortunate position of my fix not ending for another 6 years, so I will certainly not be worrying about that just yet or changing any spending habits. I have no other debts or financing to worry about either so I don’t expect the BoE rates to impact me at all. It’s the inflation itself that reduces my likelihood to buy new stuff I will be expecting pay increases to help with inflation though.

I’m not really sure of the mechanics for business loans but wouldn’t increased rates just fuel inflation further - if loans become more expansive, won’t prices go up? Certainly I can’t see business cutting costs on wages, unless the hope is the businesses go bust and people lose all their wages.

And finally people keep talking about it not being the government’s responsibility to bail out BTL landlords but this is actually hugely disproportionately affecting young people who had no choice but to pay high prices for their homes in recent years. They were not being irresponsible in most cases - it is the government and BoE that have been irresponsible. Time to tax the wealthy (and often older generations) far more than they are taxed today, to help support younger generations who unfairly pay such a large amount of tax through their incomes when people living off accumulated wealth pay nothing.

Our mortgage is fixed until 2027. We have had fairly significant pay rises this year. We’re cutting back on our spending regardless because a) we have no idea what interest rates will be like in 2027 so it makes sense to be prudent and b) we want this shit show to end sooner rather than later. If everyone keeps spending, inflation won’t be curbed, and rates will get higher.

Interest rate rises work about 18 months ahead.

Myself and other people are on fixed rate mortgages that we will still be in them, so the interest rates will not have any effect on lots of homeowners.

What is limited my spending is the increase in energy bills, food prices, council tax etc.

@GasPanic

Well I think he's right. It is known that there is a lag of at least 6 months before you see the impact of rate rises. If you blindly continue to raise rates without seeing the impact of previous rate rises, then you risk raising them too high, which is also devastating for the economy.

I still have over 2 years on my fix, so from a personal perspective, it would be good for me if they raise rates to 10% now (so that my savings benefit), and then they fall back down in a few years when I need to remortgage. I don't think that this is realistic though. I think we need a much smaller rate rise over a longer period.

They have a point but that is not the course that the BOE is on.
They were very slow to raise initially, the government has hindered them throwing money at everyone so they will very likely raise higher and for longer. They are trying to cause a recession with their one tool of interest rate rises. The Tories could have helped with fiscal policy, redirecting taxation, etc but they have not because they always choose to hammer the younger workers and protect the wealthy, mainly older people who vote for them. The BOE is in a very tough situation now (at least partially of their own making) and it is a lose/ lose situation whatever they do. If they stop raising, the pound will fall causing prices of all imports to rise even further and the UK will look weak, causing financial ramifications. If they continue to raise (as expected), mortgagees and businesses will suffer and then things will start to collapse in the financial sector. Either way, the UK population gets poorer but at different speeds.
Even if they pause, gilts will remain high so mortgage rates won't come down.

Rates will go up, as the government doesn’t have the balls to raise VAT or Income Tax, which would catch more people and dampen the economy a bit quicker, but would result in more squealing.

They have raised income tax rates a lot by freezing the bands for 5 years at a time of extremely high inflation. Workers have absolutely been hit. It's the wealthy, mainly older people who have not been and they've also had a 10% raise in state pension while the government continues to tell public sector workers that they are greedy and causing inflation while offering them only 5%.

Workers have absolutely been hit. It's the wealthy, mainly older people who have not been and they've also had a 10% raise in state pension while the government continues to tell public sector workers that they are greedy and causing inflation while offering them only 5%.

Yes, I agree. The older generation who are mortgage free will carry on spending. One in six baby boomers own more than one property, so they will probably also be capitalising on higher rents, while younger generations struggle with mortgages on their first home.

We need wealth taxes. I think that council tax should go up. Particularly on higher band properties.

CB doesn't set the cost of money at the moment, the market does. BOE increasing rates might temper inflation expectations of the market and lower costs. BOE reducing rates would probably increase costs in the short-mid term, maybe bring them down in the long term if inflation reduces.

No, businesses will pay down their debt and not take out additional loans, which will reduce inflation. They won't just carry on taking out more loans and expect to raise customer prices to pay for them. It would be foolish because customers are unlikely to be able to accommodate that rise in the current environment.

When young people say house prices are too high, they are normally met with stuff like why don't they buy less ipads and avocardo on toast. So now borrowing costs are too high why aren't they met by the same ? People buying in at high prices at the peak of the market is malinvestment. If you are rewarding malinvestment then that is going to have a huge impact on peoples choices and the consequences of the entire economy going forwards. It's called moral hazard.

The young people of today are going to suffer, to the benefit of the young people tomorrow, who will benefit from lower house prices and better affordability. Why should people in the future have to suffer to bail out bad choices in the present ? Homes should be homes, not for investment or speculation. Speculation only seems to work one way with property investors - happy while prices are going up, but not happy with the inevitable bust when things go wrong. Speculators should be taxed out of the marketplace.

For someone to be bailed out, someone else has to lose. So if rates are low, then the rates on interest paid to savers are low. Why should a person who has malinvested yesterday by taking on too much debt be bailed out at the expense of the prudent person who saved all their life, did not malinvest and now has their savings eroded by inflation running at 10% pa ? There are always winners and losers.

People in this country are obsessed by high house prices and encouraging people to "get on the ladder" even to the point of encouraging them to take on massive debt. We need to get house prices down and stop houses from being used as speculative assets by property investors. High house prices need to be seen as an economic failure. Not some sort of measure of success.

I do have sympathy for people who got sucked into the house price madness and bought with crazy schemes like "help to keep house prices high" or "help to make the unaffordable affordable". However I don't think they will end up being repo'd as it is just pointless. Just that their house/equity will end up being owned by the state with them effectively renting. That will help bring down prices across the board to the benefit of society as a whole, as there will be no engine to drive growth in price in higher priced properties.

Everyone keeps saying how few people these rates will effect but don’t they impact anyone buying a new car too?

They impact everyone and every organisation that wants to borrow money.

For whatever purpose.

Yes. I understand why people focus on mortgages, but a rise in interest rates impacts every type of borrowing including loans, car finance, credit cards etc. The theory is , if credit is more expensive this will cool demand.

I don't drive and so have never bought a car, but I always assumed that they were bought on 0% finance like sofas.

Everything has been 0% finance for years, so I wonder how many people actually pay interest on personal loans.

'We need wealth taxes. I think that council tax should go up. Particularly on higher band properties.'
@MidnightMeltdown yes, some sort of wealth tax would been far more fair so clearly The Tories won't do that!
The council tax bands are totally out of date. People will property worth many millions in London paying less than many outside with homes worth a tiny fraction. A property tax based on current values instead of council tax/ stamp duty would be something to strongly consider.

Yes which will put people off making these sort of large purchases or down grading their purchase.