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.

Today I learned what MIRAS was.

If rates hit 6/7% (they won’t) they would 100% bring in some sort of mortgage relief.

I don't really understand it all. The rates seems to spiral when Liz truss announced her terrible budget but that was reversed pretty quickly.

Were higher rates on their way regardless of Liz Truss' budget?

The other thing that was drilled into me was you could only ever borrow 3x your income. So I suppose people were more willing to buy 'starter' type flats/houses, whereas people now are keener to buy their 'forever', Instagrammable house as their first house, rather than working their way up via scuzzy flats in crap locations.

I'm not sure that's entirely true though, for a lot of people especially buying on their own or on low wages, 3 x salary would probably get nothing even the crappy areas in London and the South East. So what options are there other than to pay through the nose for rent or borrow significantly more? The further out you go to look for cheap property, the longer, more expensive and tenuous a commute might become.

What was the average house price to average wage ratio, out of interest?

This doesn’t surprise me . What does surprise me is people thinking fixed rates of 1.6% were going to be around long term. Did banks ( and people purchasing at the top of their budget) not stress test to factor in rising rates?

That's true about commuting. However, it's also the case that shedloads of people were priced out of London in the 80s and 90s (including me!)

3 x one person's low wage didn't buy you a house in London then, either. People tended to move to somewhere more affordable (or, in the case of some of my friends, stayed in London and started out with shared ownership and then gradually worked up to full ownership - plus most of them also got married and so were both earning). Bear in mind my friends who started out with shared ownership in their 20s are now in their 50s...

Isn't the whole point of mortgage lenders doing affordability checks to make sure people can still afford their mortgage if the interest rates go up?

Yes they did. But they didn’t also factor in the extreme rises in fuel costs, food, and everything else alongside it.

@curtainsfringe there's no way you can compare child benefit with childcare costs though. Child benefit has never touched the sides of what childcare for a pre school child actually costs.

There's also lots of other things you need to factor in; eg: back when 12 weeks maternity leave was standard, you'd pay full childcare costs from 12 weeks up to the day the child started school. There were no free hours. Nowadays, most mums seem to take at least 9 months leave, and many take a year. With free childcare hours at age 3, this can mean you're only paying full childcare costs for 2 years, as opposed to 5 years as it was in the past.

It's really hard to make comparisons because it's just not as simple as look

Oops! It's not so simple as comparing 2 factors.

Let's just say it was bloody damn tough 30 years ago and bloody damn tough for those with mortgages now

That's unnecessary.

Your experience doesn't mean that it was the same for everyone.

This is spot on!

Yes, but did the stress test include the full cost of living scenario that has actually happened? - 5% interest rates, 10% general inflation, 20% food inflation, cost of energy doubling, and all at the same time...

It's very easy to be smug about not being in that position and claim that it's because you're somehow smarter rather than just luckier. But fundamentally the issue is with the unhealthy relationship the UK has with property prices and the obsession with increasing property values. The whole concept of the Property Ladder is presumed on appreciation of value.

In 1992, year of Black Friday, average house prices were around £52000.

In today's prices that's around £107000 (inflation calculator here: https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator)

Today, the average house price is around £288000.

So houses cost more than double which is why it's really, incredibly daft for anyone to make comparisons to 1990s. We're in a completely different economy.

Were higher rates on their way regardless of Liz Truss' budget?

Yes. The truss budget did increase the speed of the rises though. Interest rates are going up in across the world, it's not a uniquely UK thing.

”They” thought that after that debacle that inflation would come down fairly speedily.

They didn’t bank on the “me first” economy the Tories have cultivated in the past decade. Everyone wants pay rises (fair), and everyone (businesses) have jacked up their prices (less fair). This could really entrench inflation which would be very bad, and take more effort to control. Furthermore the labour market has been resilient due to Brexit and older people exiting the Ponzi scheme a bit early than they should have.

So now it’s less good. But some better than expected inflation figures next month, and it’ll swing back again.

@HollyFern1110 clearly you were much smarter (or luckier, or being more smug )than the thousands of people who were repossessed then

Yes and my parents house was £60k. It did just sell for 1.3million where as average wage has doubled so not sure it is remotely comparable.

Wage inflation at the time was also massive, not the case now. House prices were a much smaller % of income. And energy prices are eye watering compared to then (in real terms) .

It's not just QE that caused the problem. Think it was the early 00s when people were allowed to self-certify their incomes, and borrow 7-7.5 times their income to buy a house.
Absolute lunacy.

It is really scary 😟 and bad news for us as we’re just listing our house for sale, separation/divorce so we need to sell now in order to each buy somewhere else but I fear it will take forever to get a buyer and people’s budgets will be slashed

there's no way you can compare child benefit with childcare costs though. Child benefit has never touched the sides of what childcare for a pre school child actually costs.

I didn't compare them just stated that benefits did exist...

There's also lots of other things you need to factor in; eg: back when 12 weeks maternity leave was standard, you'd pay full childcare costs from 12 weeks up to the day the child started school. There were no free hours. Nowadays, most mums seem to take at least 9 months leave, and many take a year. With free childcare hours at age 3, this can mean you're only paying full childcare costs for 2 years, as opposed to 5 years as it was in the past.

A lot more mums work now then they did in the past. And childcare costs have always been high but they are ridiculous now. The "free hours" is also a bit of a misconception & costs can still be very high.

The other thing that was drilled into me was you could only ever borrow 3x your income. So I suppose people were more willing to buy 'starter' type flats/houses, whereas people now are keener to buy their 'forever', Instagrammable house as their first house, rather than working their way up via scuzzy flats in crap locations.

There's nuance though.

Borrowing 3 x your salary means you are unlikely to afford anything & for many years renting has been more expensive than paying a mortgage so of course people want to buy.

Skipping the starter stage actually makes sense when you look at the age of FTBs & take into
consideration stamp duty. A 30 something yr old will have different requirements to a 22 yr old. I'm sure that 30 something yr old would have preferred to buy the starter flat at 22 but deposit costs meant they had to wait.

Spot on. My parents bought a house in the 80s for 3 times the average salary. Now the same houses on the same street go for 10 times an average persons salary. No change in popularity of the area.

You are obviously not old enough to remember... Wages were a lot lower then . I earned £125 a week and my hubby £260. We bloody struggled 😭