If 5% rate is here to stay

[JustAlice]

I've read yesterday that average 2-year interest rate is now 5.4%, and a 5-year rate is 5.9%, meaning that banks think the rates will be growing long-term.
As a FTB I'd like to stay optimistic - ME conflict without NATO support can't last forewer, right? The banks change their forecasts all the time. But I've made some calculations in another thread and still can't get over how jump from 1% to 5% interest rate in a relatively short time means we have now 100K less to spend on a property.
The properties we're looking at are fairly modest, and now I'm not sure we'll be able to afford them, even being high-earners.
Am I the only one who was unaware that higher interest rates impact borrowing power so badly?

This is the calculator I used, with 60 month fixed rates, and the term of 20 years. www.themoneycalculator.com/mortgages/calculators/mortgage-payment-predictor/#!/dealfinder/mortgages/

Maybe this time it will be more readable

I think it’s likely to go up. When taking on a mortagage for affordability testing you need to consider the impact of the interest rate increasing.

The 1% and 2% rates seen around Covid times are not normal, they were extremely low and it's very unlikely we will see rates like that again in the near future. The average historical rate between 1995 and 2022 is 5.62%, but it has been a lot higher. Anything up to 8% is not unusual and, on the flipside of the very low rates, there have also been times when the rates have exceeded 15%.
As pp said, you need to be budgeting for an increase, not assuming for rates to drop.

@SueDunome previously I was thinking about tracker mortgage as it allows yearly overpayment over 10% but don't have this confidence anymore. Even 2-year fix looks like a gamble now.

Turns out 1 и 2% started in 2009 as BoE attempt to make people borrow - allowing banks to still earn smth even in financial crisis.

20 year term is relatively short. You could look at longer.

in practice most people move before ten years or so and so the rate and the term get adjusted.

It wasn’t just around Covid, we had those rates since the banking crisis. That’s why people are finding it so hard to accept.

Thanks, at 6% rate it will allow to borrow 30K more (with borrowing costs increasing for 80K), I just wanted to stick to 20 years for personal reasons.

@TeenagersAngst I feel both broke and stupid for not taking up mortgage earlier.
But there was a lot in the news about rates going down, and prices are still Covid-high, so I decided it will be wiser to wait.

This thread reminds me of when we moved some years ago. Pretty much all mortgages were not fixed back then, and I think the floating rate was then about 7%. I was worried about affordability, and asked what monthly payments would be at say 12%. The advisor laughed at me and said that we’d never go into double figures……yeah, right. A few years later we were paying about 16%, and fortunately could (just about!) cope with that. But many, many others could not, and there were a fair few repossessions around us. So you are very wise to be thinking about affordability should the rates increase.

@Noseyoldcow honestly I have not been thinking about rates going above 6% yet. Probably we should now.
I'm more upset realising what we can now actually afford.

Surely if average fixes go over 6% this will have a large downward pressure on prices? Not many FTB, especially in the SE could m purchase at that level (me included!), and without FTB, second steppers can’t make their next etc

My first mortgage was 7.5% and my dad told me to fix for as long as possible as he’d never known rates so low! 😆🙈. I fixed for five years, they did creep down during that time.

What I can see in my area and posted on another thread is that most properties come to the market with 10-15% increase in comparison to Covid prices and just stay there. The most desirable ones or reasonably priced still find their buyer, but most just hang there, some from the Summer'25.
Maybe they are not really for sale, just some upsizers dreaming to make £££ to fund their next purchase.

Probably the rates are not as important long-term, as sometimes you win, sometimes lose, the average will be in between.

My first mortgage was 7.49% just before the dotcom crash, I quickly regretted my five year fix 😩

Rates are creeping up but there’s good deals to be had. When mortgages are cheaper, property prices go up. So it’s good for building equity, bad for monthly outgoings. Pick something affordable.

As someone else has already posted 20 year term is very short. Most 1st time buyers do 25 years and I wouldn’t be surprised if the
norm was now 30 years!

I bought my first house in 2007 on my own. It was 6.5%. I could only afford it on a 35 year term. 5-8% is your average. 1-2% was silly and did not reflect reality. I always make sure I can still afford the house with a 4% rise. So when I had a 6.5% mortgage I made sure I could afford the house if it went up to 10.5%. It meant a bad house in a bad area. But that’s life.

No one knows for sure @JustAlice
My opinion, from following various people in finance for some time, is that the central banks will lower rates, probably later this year and into 2027 as we hit a global recession. If this happens, 10 year yields, etc, will fall. I also think that this will have a negative effect on house prices, a good thing for you, as long (as you aren't made redundant). If this happens, the sellers who have priced too high and aren't selling will either pull their houses off the market or start to drop the price. If I were you, unless you are in a hurry for personal reasons, I would continue to monitor the market and the economy and not rush in at present. However, I do think that rates will be much higher in the longer term, exacerbated by massive $$$ printing in response to the financial crisis.

I reserved a house on 28.02 (new build hence I say reserve), which was the day the war kicked off. When I did the mortgage application the broker said I was lucky as they were about to withdraw the rate. I only secured it for 2yrs as prior to middle east kicking off, rates had been dropping nicely as i’d offered on a flat locally 2.5yrs ago and rate was 5.8/9 back then. I got 4.08 and that was less than a month ago.

I emailed the broker last week to ask if it was possible to extend it to 3-5yrs fixed and he said the rate was now 5.1 for 3yr, 5.4 for 5yrs. So I kept my 4.08 and feel lucky. It is frustrating and I might have re-thought going to top of my budget mortgage wise had I realised how fast things can change. I’ve been renting for 25yrs (bar owning with a partner for 5yrs 15yrs ago) and so wish i’d have been in a position to buy earlier when the rate was under 1% and houses were a lot cheaper. As it stands i’m taking out a 25yr mortgage at 49. Stress.

I would expect average rates to be up to 6% or a little more by July/August. Looking further forward is just a guessing game - but my guess would be the emergency low rates we experienced for more than a decade after the 2008 financial crisis won't happen again in the medium term.
On a positive though what is likley to happen by the end of this year though is a significant softening of values. Higher borrowing costs and another round of inflation means current prices can't be supported imo. Your point about the most desirable homes or well priced homes always finding a buyer is true though.
Dont beat yourself up worrying you missed the timing -because many who stretched themselves at low rates will also have a difficult time as their asset value shrinks and the cost of their borrowing and living increases. Its always swings and roundabouts.

I Think we will see the rates keep going up. I just renewed our mortgage at the end of the term and fixed for 5 years. Luckily did it at the right timing so didn't get hit with a big percentage increase and am glad we went for a longer term. Sadly I think you probably need to reassess the type of home you can afford

We bought our 2 bed house 9 years ago as a starter home and have had to accept it's going to be our home for longer than expected!

Also because house prices are so high. If rates are 7% etc long term that will have a big impact on house prices but it will be a slow process.

Lots of London property has stagnated in the past few years already.

Regardless of mortgages NATO shouldn’t be getting involved in this war. Interest rates are historically low for a long time, people got too comfortable with them. They’re now back around average. Everyone should plan accordingly.

If you take a longer term you can often still pay off a certain amount each year extra and end up paying it off earlier.