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/

We just fixed at 3.1% for 3years (we are in Ireland) our variable before that was 3.95%

"Sadly I think you probably need to reassess the type of home you can afford"

I dont quite agree with this. Although its inconvenient to have to wait - I think if you can and you focus on building as much deposit as possible - you may get an unexpected bargain on the type of home you want.

I went through Zoopla yesterday and noticed a lot of reductions have been made in March, some properties are already priced just few Ks over what they have been sold for in 2019-2022.
Meaning for now, there're sellers motivated to sell, but they are 1 reduction away from negative equity, so might as well pull out from the market by September.
So far I've seen only some leasehold flats reduced below their previous sold prices, but these are the ones with high service charges (over 2.5K) to blame for that.

I too expect rates to keep going up but what can you do other than increase your deposit and plan accordingly with your budget and that wriggle room you need? As a FTB buying alone at 50/51, I plan to get a lodger to help pay my mortgage. I also plan to overpay on my (probable) 15 year mortgage because I do not want to be paying it past retirement age AND have maintenance costs hanging over me. Prices will fall too.

Yes, and if we overpay, we can reduce the term while re-mortgaging.

There is downward pressure on prices.

but in the U.K. the general response to that is not to move. So very little sells and very little comes on the market.

which is pretty much where we are.

taxes will keep going up due to economic pressure and utilities/food will also keep increasing so I would wait if you can and as pp said you may get a good bargain.

Anything above 500k is not selling for a long while in my area some on the market for a year.

re fixed rates, these give you certainty at least. Most mortgages will allow an overpayment. In the early years it’s more expensive with setting up a home (more if having children) BUT things do change as you get through that phase so it maybe helpful to think of your property buying journey in chapters - while you are not where you’d thought you’d be now in 2-5 years time you could have a better mortgage deal or move - try to see the flexibility in the future

On a personal level what does this house mean to you? Is it quality of life, independence, pleasure from a space for a hobby, next life steps entwined with values thy are important to you.

Buying is better than renting due to what has happened to the rental market IMO

A good plot and location are top factors - a larger house has drawbacks: expense of boring and maintaining v financial security (if it’s more affordable less pressure) TIME and skills spent cleaning and maintenance, stuff goes wrong and it can take up head space, you will have rooms you don’t use! I’ve put the above to help serve as a little balance in adjusting to a slightly smaller affordable house.

There was a comparison somewhere I saw - the person who buys a smaller house less mortgage and still saves and invests is better off financially than the person who buys the large home with bigger mortgage.

House don’t give big boom returns from yesteryear hence up the ladder isn’t selling and some sources say we are midst a more subtle house price correction stages

Nobody was ever getting 1% as a first time buyer. With loads of equity and not being first time buyers the best rate we managed to get back in the noughties was between 1.5 and 2% and it was short lived.

So there's no point OP thinking she's lost out on 100k of borrowing based on an idea she could have had a 1% interest rate.
The reality is yes interest rates are higher now but that also means the following

Interest earned on money saved for a deposit is better
Property prices have definitely calmed and are dropping because buyers can't afford them

In reality buyers end up with the same sort of house regardless they just pay a different price for it

Yes, that's what I mean, but it also often gives you access to better rates in the meanwhile.

When my son and his partner bought 2 years I told them to buy a place you can stay in for 10 years plus cos moving is expensive

and get one with an extra room in case you need to take in a lodger - appreciate not everyone can and want to do this

it’s only because they had a big inheritance to use as a deposit they had a choice

They have a lodger and they are using half of his money to overpay the mortgage

the mortgage was originally 3.7 but cos it took so long to buy it went up to 4.1

mortgages should be around 5percent
but the only problem is houses are not lower in price to reflect this mortgage rate

and governments will do anything not to cause a major drop in houses prices

Very unlikely to be in negative equity.
They will have put down a deposit, and oaid off some capital.
If they sell for 10k less than they bought it for, they should still clear the mortgage.

Id say the current rates are about historical average. Trouble is, lots of people making house purchases currently have only ever registered a weird blip in interest rates - those super liw rates are not typical.

@previouslyknownas I don't think Labour government is worried too much about homeowners at the moment. They are already rich by Labour standards.
Also this government can't really afford to drop stamp duty or see inflation reaching 10% as it's forecasted due to fuel prices, so interest rate drop is also unlikely.
Hopefully they'll leave things alone and let the market decide.

And with interest rates headed that way, oil shocks in the ME, inflation is only going one way. So useful if you have savings and you can inflate your debt away, as long as you get decent pay rises and agressively maximise your earning.

A lot of people with mortgages in Australia have a deal that allows unlimited overpayment. It doesn’t matter how much extra, it all makes a difference as here, your interest is calculated daily but credited monthly. When we borrowed, we almost immediately made a deposit (government grant at the time) which came off the principal and gave us immediate overpayment from the next automatic direct debit payment.

Mortgages can also be paid more often, which we did, and it made an enormous difference to our repayment date and the total interest we paid across the life of the loan. www.loans.com.au/home-loans/first-home-buyer/does-paying-your-mortgage-fortnightly-save-money

Also, as overpayment here is so common and easy, one method is to set a direct debit amount yourself and keep it. So you can set an increased amount which has the advantage of cushioning your budget from some further interest rate increases and also increases your overpayment when interest rates go down. The bank said “your first payment due is $700.” We said “we will set the direct debit at $750.” It took four rate rises before we needed to make an adjustment.

Offset mortgages here are also very popular. Have a look into them.

1-2% fixed rate mortgages were historic lows and most financial articles I have read or heard point to it not happening again. When we first bought, our fix was around 5%. Yes you hear of the years of 10%+ but if you analyse it all, the 5-6% ish mark is where it sat. Little point in pining for those cheaper years I don’t think.

Previous posters are correct - banks will inform you in your paperwork what your mortgage would be at 10% etc. It might not happen, but in these days, you just don’t know and you need to keep it in mind especially if you were sole provider. I have had mortgages for 20 years and it’s got nowhere near that ever.

I see you mentioned overpayments, if this is something you can afford on top of a mortgage payment then suggest you shop around for best mortgage - we have just taken out a 5 year fixed (re)mortgage with our bank and it allows unlimited overpayments (as long as you don’t fully clear the balance). It was also market leading at the time. It just wasn’t available through a broker. I always thought you were stuck to max 10% overpayment each year so I learned something new. Definitely worth shopping around and reading and understanding the terms of the different mortgages you were looking at.

Honestly, it’s a huge step and there never seems to be a good time to do it - always rates or house prices going up. These drops we keep hearing about very rarely happen. Dont bank on what might happen but go with what it says you can do on paper and that you’re comfortable with

I first got a mortgage in 97, I had a fixed rate, different products for the entire 25 year period

OP 5% is completely normal and reasonable for a mortgage rate, when I first got my mortgage it was 8% (you do pay slightly more for a fixed as you're buying predictability).

Like other posters I recall 5 percent being about average for interest rates - I fixed for five years at 3.34% which will run out next year. I expect this will move upwards next year but I have a good LTV. I’ve been overpaying in the meantime so that the cost isn’t too much of a shock.

Its not just you OP, for those saying FTB never got 1/2%, yrs they did, my DP got a rate of 1.7% 10yrs ago. We bought 4yrs ago at 2%, and vaguely budgeted for it to double at renewal, about now. I tried to fix for 2yrs at 3.9% in feb and my mortgage advisor advised not to fix yet, then iran happened and its flown up past 5!

I dont think its unreasonable to budget for your interest rate to double. On top of cost of living too, we used to feel like good earners 4yrs ago but im starting to feel actively poor again. I DREAD to think what its like living on less! Not possible! We dont have a lavish lifestyle. Intetest rates alone will add many hundreds onto our monthly outgoings. I dont feel the house is worth it, so we're downsizing to pretty much the bottom of the market again 🤷‍♀️

OP 5% is completely normal and reasonable for a mortgage rate

Not with today’s prices though!!

I think my house in the late 90s was over 7%. The payments were not much different to what I'm paying now (less than £100 difference) on a mortgage less than half of what I have now and a household income significantly lower.
We didn't overthink it and just got on with it.

Nothing happens in isolation so if the interest rates go up that should mean that the economy is doing relatively well as a whole
When the interest rates are cut, it usually means that there’s a bigger catastrophe going on
At the moment, it feels as though there’s a bug in the system
There’s no logical sense being made of any of it

I've read about offset mortgages few years ago, but IIRC, they are hard to find in the UK, mortgage rates can be higher or they require higher LTV, and also it works only if the mortgage rate is lower than interest rate from your deposit.
But there was a good advice from @Toodaloos about shopping around for fixed rate mortgages with unlimited overpayment option.

Oh I've completely mixed up negative equity and selling at a loss. The sellers are far from negative equity, at least this year.

Talking about selling at a loss in comparison to Covid prices, it's not really a loss if it's the same amount as stamp duty covid buyers have been spared.