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/

I bought my first house on a 100% mortgage when interest rates were around 8.75% ("rates will never be this low said the mortgage advisor!) . They promptly started climbing until they reached 14.25 % less than 3 years later. MIRAS had been abolished just before I bought in 1988 so no, I absolutely did pay about 70% of my take home pay in mortgage and did not get any tax relief.

Edited to correct spelling

That’s amazing because it wasn’t abolished until April 2000
I wonder how you missed out on that ?

It was finally abolished completely in 2000 but changes made to reduce its effectiveness during the 90s. I think I missed out as the price of the house I purchased was just below the threshold. I was paying an interest only mortgage and most certainly didn't get ant tax relief. Also as a local government employee didn't see much in the way of pay increases.

I see
So you purchased a house for less than £30,000 ?
Still £30,000 would’ve bought you a two bedroom terraced house in the London suburbs in 1988 that would be worth over £1 million today so it doesn’t sound as like you did too badly out of the arrangement for a public servant.
How’s your pension by the way?

I was in Scotland so property prices have not risen as they have done in the SE of England or London. The house I bought in 1988 for 30,500 is now worth about 3 times what I paid for it.

As a public servant in the last 15 years I have had several years where pay rises have been much less than inflation. I've also had several years where I was working part time or not working at all due to caring responsibilities so actually my pension is far from "gold plated" thanks very much.

Not everyone lives/ works in London - wages in Scotland have always been lower than the SE and I graduated in 1985 when Thatcherism was playing out in the savage deindustrialisation of Scotland. I also had to pay Council/Poll tax as it was introduced in Scotland before anywhere else.

So the average house price in Scotland in 1988 was £26,000
8.75% interest on that I would take all day long
People are currently paying 7% on 300 grand

You do have to take into account lower wages in areas outside of London and the SE and often the lack of employment. In late 1988 unemployment in Scotland was around 10.5% compared to 4.5% in the SE (excluding London).

The job I had in 1988 doesn't exist any more due to public spending cuts and successive local government reorganisations. The starting salary now for a,similar post wouldn't be enough for a single person to buy the house I bought in 1888.

I do appreciate my privilege as I and my dh were in a position to make a couple of moves in the 90s/ early 2000s and were fortunate to sell in a rising market. However my first purchase as a fairly young single person was very hard and I literally had less than a fiver left at the end of each month - it was very stressful and I had no social life.

We also as a couple made pretty big sacrifices in terms of having a pretty frugal lifestyle and learning a LOT of diy skills to be able to refurbish our second home and our last home we could only afford because dh did everything except gas plumbing.

I do understand that the current housing market is challenging but the narrative that we "boomers" had it easy is so far from.the truth.

And my dd is currently paying 5% on about £125k so I'm not ignorant of current costs. She was very very fortunate to have been gifted a small deposit by grandparents.

Incidentally interest rates were over 10% by the end of 1988 and were 13% by 1989.

I do understand that the current housing market is challenging but the narrative that we "boomers" had it easy is so far from.the truth

The narrative is it was easier not easy…

Can"t you fix for longer?

And they have touched 17% at one point? I think base rate at 5 - 6% and mortgage rates around 9% is not an unreasonable expectation in the present geopolitical climate. And of course it is the "Ten Year Yield" that decides the cost of your mortgage debt not the BOE rate.

In the early 90"s you could buy an ex-council house in Scotland for 12k, remember the big property price crash started to spread out from London around 1988, many people took many years to recover their lost equity from that one.

I’ve gone back to them via email and asked as ideally I want 5 years
they can get me on 5.2% but want a historic default paid off which I can’t do (I’m paying it off monthly, no interest, payment plan)

At that rate I would fix for Ten, if you need that long that is.

Really? You don’t think it will drop? The 5.2 is a mainstream lender, the 6.2 is adverse

It absolutely will drop. I keep getting phone calls from the lender almost begging me to fix at 5.2 and I keep saying no.
The week before they were begging me to fix at 5.5
It’s a gamble, but we’re not actually talking any more than 30 to 50 quid so I can risk it

I don"t think it will drop and stay dropped, that was achieved by all the main central banks co-ordinating with QE etc. to keep rates at the lowest level possible, now the global situation is totally different, countries are looking out for their own interests (Japan saying they will hike rates for the first time in decades for example, that alone is massive for mortgage rates even without the Iran situation) Trying to predict the bond market with mortgage debt is a bad move in my opinion, it just takes one event (the news of the last couple of hours for example) to turn markets on their head, and with short fixes on mortgage debt you are totally exposed to the bond market.

How old are you?

If home ownership is important to you, as opposed to staying in rented, you just need to bite the bullet and go for it. There are too many variables to be able to control every aspect of it. You can’t time the market. You need to just make the jump.

I am kind of of the opinion stretch yourself for the best house you can get - and by that I mean size / best area / potential. Not one that’s been done up and dressed nicely. But would caveat that with not stretching yourself to a silly degree. Find the balance.

Rememeber that the value of the purchase price is only going to go down in real terms.

The sooner you get the mortgage loan and start paying g it off, the sooner the debt will go down.

Have contingencies for if rates go massively up or if you lose your job etc. so for example I have insurance in case of ill health and I have redundancy insurance (I work in a volatile sector). But if I am unemployed for any other reason, I would stop paying for the kids wraparound care (which is extortionate), would stop our cleaner, and would sell our car as it wouldn’t be needed (currently need it for work). Husband would also easily be able to take on more shifts as I’d be around to do all childcare.

Likewise, if mortgage rates go up exponentially, I can take on extra shifts at work.

The mortgage is also due to end at my age 60, so I could extend that probably by around 7 years to bring payments down.

I think it’s a state of mind thing. I understand some people don’t like uncertainty but it’s really the only way.

@ohtobethin there’s very little more unsettling and uncertain in life than renting you home
If you run into financial trouble, your lender will let you go in trust only as a last resort if you have a pension in place
Landlords are far less flexible

Yeah I get that. I’ll have a chat with the broker
in that awkward position on the edge of mainstream and adverse

Yes, I agree.

yes, some peoples homes are repossessed, but it really is a last resort. Lenders will generally work with you and do all they can to let you keep your home. Repossession isn’t in their interests either.

Once you’ve paid the purchase price for your home, yes, you are at the mercy of interest rates, but everybody is in the same boat, and you can control the length of the mortgage, you can go interest only for a time….there are options. In rented, you are at the mercy of the landlord entirely.

I find that generally most people pay their mortgage and then cut their cloth accordingly with all other expenditure.

OP, I think you are overthinking it, but I do appreciate it’s a huge financial decision. Im
Not suggesting you borrow recklessly or go into it with your eyes closed….but you really can’t control the market or interest rates. You just need to jump.

I think for my next move I won’t be trying to time the market but I will definitely be trying to find the most perfect house that all of the energy should be directed in my opinion find the best house that works for you with the least amount of compromise possible and then just make it work find a way to afford it
A happy home life is massively underrated

Yes, ideally you want to find your long term home in as few jumps as possible.

Better to overpay for your house by £10k / £20k / £30k (or whatever) than buy a smaller house and then have to make another move, with another set of moving costs, stamp duty, conveyancing, estate agents fees etc.

If you are lucky. Current rates are still historically low. Average rate over the past 50 years is over 7%.