The end of cheap money?

[mx stu]

So upon hearing that 'the era of cheap money' is coming to an end (given the recent big increases in 10 year bond yields) I had a think about how changes in base rate could affect us going forward.

I'll be the first to admit we were perhaps quite ignorant in thinking about future mortgage rates when we 'stretched ourselves' earlier this year to buy our current place and harbour some concern about what could happen in the future. When I say we stretched ourselves what we bought wasn't a mansion and we paid the market rate for a family home, which we needed having massively outgrown our 'starter home' (having two kids since we bought it).

Looking around I see that in the early 2000's a base rate of around 6% equated to standard variable mortgage rates of 8%. Our current fixed rate is at about 4%, expires in 2016 and I'm thinking about what the state of play could be at that time? Could we realisticly return to a 6% base rate and 8% mortgage rates? Given the rapid rise in property prices up to the 'crash' surely if these kind of rates returned the country, and specifically the property market, fall to its knees?

Any wise old heads wants to speculate about what happened in the past and whether it could happen again?

[bogie]

well I lived through the 14% years and thought I would never afford my own home....a few years later I did

you cant predict what the economy is going to be doing in 3 years, nor what government of the day will choose to do. Interest rates are a tool they use for a variety of reasons. Im sure all the experts wish that running a country was easy and predictable

Personally my strategy 25 years ago when rates went through the roof, was to focus on something I had some control over e.g. my own personal development and career. Dont think yourself poor and accept what you have will be the same forever. Think about ways to earn more and afford a larger mortgage or be more comfortable paying the one you have and invest time in yourself

[marky1]

I can't see 6% base rate in 2016 but I can see 3% in the next couple of years.

[Birkin1932]

Market rates have risen as a side effect of what seems to be the Bank of England giving up on QE. As a stimulus, so what else will they do because the economy needs something!

I see nothing in the real economy that would warrant a rise in the base rate.

With Osbornes cuts today this will further hamper growth, I agree with his view by the way.

I do not see interest rising for a decade.

The Bank of England will attempt to inflate debt away by reducing the value of the pound.

If rates went back to normal in say 5 years, there would be the mother of all property crashes

[Chipper]

I think I read today that 40% of mortgages are interest only. If that is true know wonder the BoE is doing their best to keep interest rates on there arse. Regardless of this I think we have a couple more years of low interest rates and then small increase. Just keep paying it down while you can.

[otolith]

40% seems high, but I suppose there's a good chunk of BTL in there.

[RichS]

That's my big issue though- what happens in say 10 years' time when every BTL owner wakes up and realises they need to repay a bank? Won't that lead to a flood of property onto the market?

[RichS]

And yes 40% is high but I read today 20% are people who pure and simple can't afford to repay

[davepoth]

It's not going to happen in the short term. The market is too fragile for that, so it's likely that a devaluation would come first. Realistically you are going to be a few years before the base rate starts creeping up, but it's not going to be a big fluctuation. You need to be more worried about what the banks decide to do really.

The obvious answer is to shop around for a long term fixed rate that is affordable given your current circumstances.

[98elise]

RichS said:

That's my big issue though- what happens in say 10 years' time when every BTL owner wakes up and realises they need to repay a bank? Won't that lead to a flood of property onto the market?

Who says they don't already know this?

I have BTL properties, and I'm well aware that I need to pay them back at some point.

[onomatopoeia]

Chipper said:

I think I read today that 40% of mortgages are interest only.

My mortgage would be less than my council tax if it was IO!

[Hyper10]

Its possibly a combination of things, the BOE by telling us that rates are likely to rise can't later be accused of not being clear,the cost of money in the markets may rise anyway and it acts as a warning that if consumption grows too quickly that can raise rates(pigs might fly)
I suspect since Mark Carney is favoured, we will hear how wonderful he is. I read an article last week where it told us that Mark Carney has lots of tools at his disposal to help the economy. It surprises me that Mark has all these extra unnamed tools that King didn't or Bernanke or any other Central Banker. Given our national Debt, base rates will likely stay low for a good while, Mortgage rates might rise a bit but one would assume given the political dimension the disparity between rates wouldn't become enormous.

[fido]

onomatopoeia said:

My mortgage would be less than my council tax if it was IO!

.. which is presumably why you don't have an IO mortgage .. and those on >100% LTV are going to be predominantly IO

[jeff m2]

Hyper10 said:

Its possibly a combination of things, the BOE by telling us that rates are likely to rise can't later be accused of not being clear,the cost of money in the markets may rise anyway and it acts as a warning that if consumption grows too quickly that can raise rates(pigs might fly)
I suspect since Mark Carney is favoured, we will hear how wonderful he is. I read an article last week where it told us that Mark Carney has lots of tools at his disposal to help the economy. It surprises me that Mark has all these extra unnamed tools that King didn't or Bernanke or any other Central Banker. Given our national Debt, base rates will likely stay low for a good while, Mortgage rates might rise a bit but one would assume given the political dimension the disparity between rates wouldn't become enormous.

Yep, control with saliva, but if inflation continues then he will be forced to increase rates, which inturn will push Sterling up (which they don't want)

With Europe still not off the hook, Sterling and UK in general look half decent, esp if you happen to be a Russian or Latin American Billionaire.

Take a look at China, they have a tough time controlling their economy because every time they put the brakes on to prevent property speculation everything else crashes. Money that could used to enhance overall growth by consumer spending is being gambled on housing units in the boondocks.

IMO an extreme version of UK, for some time too much money from each paycheck has found its way into housing. In UK most (if not nearly all) those houses were built years ago, increase in price does absolutely nothing for the the economy except reduce discretionary spending and put the hammer on growth and reduce ones standard of living.
Of course in UK this situation has been because of demand not speculation and peoples desire to live in a reasonable house without the front yard paved over

Growth is also hampered by taxation, VAT is at a ridiculous level, its mere structure is anti business.

IMO the Gov has put itself in a very difficult situation, it has too many benefits to pay which are all linked to inflation. It doesn't matter how much they frig with CPI and RPI that figure will increase. Their solution so far has been to find new ways of screwing every last cent out of those that have been beneficial members of society.
That only works for so long, when a business owner can enhance his bottom line by spending his time arranging his tax affairs than by growing his sales something is wrong. We need to return to a situation where a business owner only needs to worry about growth, with growth comes lower unemployment.


Money needs to flow in different directions for growth, even Socialist understand that, Liberal agendas crept in, they want to spend money to help the less fortunate but in doing so helped the xxxxxxx bone idle create their own life style of "money for nothing and TVs for free".

My solution get back some of the old Socialist that understood five and ten year plans, there's gotta be some still lurking in the Halls at Oxford, they may have opposed the Tories but knew how to make things work while understanding the money has to come from somewhere. That somewhere was by allowing business to provide it. They can take care of the hospitals and transportation.
Execute every Liberal, may as well top all the social workers too.
Remove VAT, replace with end user sales tax, with duty where necessary.

Duty where nec would be of course be very heavy on sportswear and sneakers

st my coffee just got cold.

[4xTrader]

I dont post much...but great post jeff!!!

[NoelWatson]

jeff m2 said:

Of course in UK this situation has been because of demand not speculation

How can you determine that?

[jeff m2]

NoelWatson said:

jeff m2 said:

Of course in UK this situation has been because of demand not speculation

How can you determine that?

'Twas in comparison with China where there has been rampant dice throwing.

[fido]

jeff m2 said:

NoelWatson said:

jeff m2 said:

Of course in UK this situation has been because of demand not speculation

How can you determine that?

'Twas in comparison with China where there has been rampant dice throwing.

Hmmm .. BTL investor or BTL gambler? IMO all investment is dice-throwing to some extent!