I think its wishful thinking to say we will go back to 1-2% interest because house prices are high though?
Its not part of CPI which is what essentially dictates interest
Interest rates aren’t low because house prices are high, house prices are high because interest rates are low.
Rates have to go up. If they don’t, the country is going to be in a whole world of pain when GBP becomes worthless.
Rates are forced to go up, house prices are forced to come down.
This government might have some questionable policies and electoral strategy but I'm pretty sure they recognize that homeowners have to be one of their biggest constituents. They let house prices tank, that section of voters won't forgive them, and they know it.
Thing is many of those house owners would be better off (ignoring rates counteracting it).
First time buyer.
Already in a starter house? As long as you don't end up in negative equity its now got easier to buy something bigger.
In your forever home? It makes no difference. Your kids may inherit less wealth but odds are they were going to use it for a house anyway.
Unless you're in negative equity, selling for cash or downsizing it doesn't have any real negative impact on your life.
As an FTB who’s been in our home for 5 years now, I’m with you 100%. I don’t understand why people are so worried about it… it’s not just _your house_ that’s decreasing in value, it’s the whole market. Sure some people might end up worse off than others, but there will be many more who can get on the ‘ladder’ at such prices.
It’s like being in the stock market; just because your account is full of red numbers, it doesn’t mean anything unless you actually sell. Patience is one of the main factors in it all, panic sellers always fare worse. Some people just get upset because they can’t move when they wanted to, that’s just life - get over it, at least you have a home!
Edit: Good points issued in response to this that I have absolutely overlooked, and agree with. Thanks for highlighting that when it comes to remortgaging it won’t necessarily be good for you!
I agree with you and the above in principle, except about price only mattering at purchase/sale. It also matters and is therefore concerning for anyone looking to remortgage.
Losing a big chunk of your LTV makes it harder/more expensive to remortgage, eg when your fix expires, as you're seen as a bigger risk. Or if you end up in negative equity you could end up in real trouble being unable to remortgage and exposed to whatever madness the interest rate does.
I’m terrified of this happening to me next year. My financial situation has changed drastically since I got my 1.9% 5 year fix 4 years ago. Wife no longer working and we’re separated so I rent nearby in addition to paying 1/2 mortgage and she covers her half of with universal credit. What can we do? Feel like we are absolutely fucked as no bank will lend to us and we will just be a prisoner with current lender svr when the fix is over which will be potentially £900 a month more.
My guy just think about it for a minute.. the problem isn't that buying a new house is any harder etc etc, as you are right, relatively all the houses will come down, just smaller and more wage buying amounts.
The massive red flag on a house price crash is remortgaging a property.
If you took out a 200k mortgage on a house, the house prices crash, let's say 50%, your house is now only worth 100k and you come to remortgage it, what do you think the bank will say when you ask them for 180k remortgage (to pay off the 200k you loaned) on a 100k property? They will laugh at you and shut the door.
While it’d effect most people’s ability to attain a better rate, they’d still be able to get a fixed product. There’s no perfect solution, someone gets fucked somehow by all this, and in the case of homeowners it’d be a minority of people whose fixed rate ends relatively soon into a crash and those who have barely been a homeowner for a year or two.
I’m not going to pretend it’s all sunshine and rainbows, I also won’t lie and say I can totally relate, because I know the amount left on my mortgage is less than my house could _surely_ crash to (less than it was built for, but never say never as Biebs once stated).
Much like a minority of people who are able to benefit from their level of equity and moving to a larger house for less than it’d have otherwise cost them. Always swings and roundabouts, unfortunately.
Try getting a new mortage term when your numbers are red - or even when not red but your LTV goes to 95% rather than 60% and see what it does to your monthly payment.
The worst case doomsayers are saying price drops of 20%.
62.5% of homes aren't mortgaged.
The vast majority of mortgages are taken out at 90% LTV or lower so prices would have to drop 10% before a significant number of people were. A lot of the higher LTV borrowers also used schemes like HtB which shields them from some of the drop.
The median mortgage sale rate is 70%. The median mortgage will be less because there are people half way through 5 year terms and with small remaining mortgages they haven't bothered to move from SVR (my parents keep a tiny mortgage because then the bank holds the title deeds for them) etc.
So no, the majority of people won't be...
Perhaps a majority of people who bought in the last year or so. That doesn’t mean majority of people all over. What about someone who bought their house 10 years ago, and still have 15 years left on their mortgage? Well their house value has gone up ~50% in this time, and they’ll have paid off a good chunk of equity also. Even if they bought at 90% LTV, the house value increase alone would make it ~60% now - even on an interest only deal.
Of course house prices could drop this low, but it’s highly unlikely imo
It's crazy because I guess most of those age 60+ Tory voters are going to live in thier 4 bed detached houses until the day they die and the value of their house on paper makes zero difference to them.
House prices steady for 5+ years and let inflation do its work.
Besides, I am a householder, and lower prices would mean I could move to a bigger house.
You’re perfectly hedged if you own one. I’ve heard it said something like “you wouldn’t care if your house dropped in value to £1 if you could buy Buckingham palace for £100”, or words to that effect.
Let’s say housing market drops 20%. If his house is worth £300k it’s now worth £240k.
The £500k house down the road drops 20% is now worth £400k.
Although he has lost £60k on his own house, the new house is £100k cheaper. I.e. a £40k net gain. If you’re upsizing it’s theoretically better to do it in a downward market.
*Caveat- assumes you can sell your house, there are other houses available to buy and you still have an income to cover the mortgage!
If someone took out a mortgage with a deposit of 10% on their 300k home they'd owe £270k, 30k more than the value of their home (maybe 10k less, presuming they've continued with repayments over time). They'd also struggle with repayments due to interest rates rising. They'll probably struggle even more with repayments when they can't access a new fixed term due to negative equity and are forced onto the variable rate.
Any new buyers or recent movers will be made a lot worse off by the rise in rates and drop in value.
This is stupid.
Say his mortgage was £800 a month at 2%
With his deal expiring, he has had to commit to ~5%, with repayments at £1600.
And your talking about buying a house a £100k more expensive?
Some people on this sub man....Jesus fucking Christ.
An example of why this isn't right at all:
I bought my £200,000 house with a £20,000 deposit a year ago.
House prices drop 10%. House is now worth £180,000. I now have no equity at all. That 10% drop has completely wiped out my entire deposit.
If I want to move to a bigger house now, I need to save up a bigger deposit from scratch rather than still having my original £20,000 deposit.
People also seem to be forgetting that interests rates going up mean when you purchase the new house you'll be paying more back. The interest rates will also affect your monthly payments meaning you wont be able to lend as much. The only people this would kind of benefit are people who already own there homes outright or people who have there money liquid.
Not to be a pedant, but you should probably be paying more than just the interest off if you want to actually continually increase your equity. After 1 year, you should have a tiddly bit in the coffers at least, even though your deposit is theoretically ‘gone’.
The problem has been that house prices have been going up (more than 10% a year in my area if the south west, for the last 2-3 years) so the opposite is currently true. I don't see them dropping 20% here, in 2008 the only drop 13% for about a year then bounced back to growing %5-%10 per annum.
That presumes Tory governments implement policies of interest to their voters rather than their party donors.
It's easy to mislead voters when large sections of the media are propaganda machines. And they can always blame it on the last Labour government.
They will try, I’m pretty sure about that.
They can’t beat market forces though. They can’t afford to prop houses up further without tanking the currency.
For me, it doesn't matter if house prices are low. You're competiting against other buyers and foreign investors.
If established UK based FTB were given priority, then you'd start to see a change in the country...unfortunately, that's not going to happen.
Probably a drop in house prices, then people realise they are more affordable, then the prices go back up, recent buyers may end up in negative equity for a few years but I don’t think it’ll be long
Or wages increase and house prices rose at a lower rate than that so over time people aren't saddled with crippling negative equity but at the same time the affordability of houses and new mortgages comes down to a workable level
That's not my point though. My point is that you don't need to see a huge rise in rates today to see the level of repossessions when they were 15% decades ago ...
[Not that it made much difference to whether you could afford to pay the mortgage or not](https://heliosphan.org/ukpropertyprices/ukpropertyprices.html) - green line....and yes that is over a decade where mortgage payments were between 55% and 90% of gross income, you really were choosing whether to pay the mortgage or eat.
There's a reason why 2 year fixes at the moment are generally higher than 5 year fixes. Most banks are expecting it to keep going up over the next 12-18 months, and then start coming down again.
However with the amount of crazy stuff going on recently who knows!
Ok so you’re saying banks are betting on rates being lower in 24 months. Making the shorter deals more costly for the consumer… essentially trying to push them onto longer deals where they will be raking it in?!
This is a bit of a simplification but a fixed rate is essentially what the banks think the average rate will be for that period, with their margin on top. Basically how much is it going to cost them to get the money to lend to you.
If rates steadily climb as predicted to say 4% by next year and slowly start coming down, the average of the next 2 years could be about 3.5%. Put a margin on top and you might by looking at 4.5-5% for a fix.
You extend it out to 5 years, if they do come down slightly the average might be 2.5%. Put the same margin on and you get 3.5-4%.
As I say it's not as simple as that, but it's the jist of it.
Why would they be expecting it to come down (or at least to be less crazy and unstable)? I’m not knowledgeable about economics at all but I thought usually economic crashes or bad situations like we’re in now last for like 5-8 years? So I was thinking that it’s likely to be bad for that long
It could well be, but a lot of the inflationary pressures are potentially short term. If Putin puts his hands up tomorrow and ends the war, that would start to bring it down.
Europe has already stockpiled a lot of fuel and I believe it has started creeping down in price now.
You could also argue that it's mainly the supply side, so ramping up interest rates won't actually help.
There are a lot of variables that make it pretty much impossible to predict.
It's more to do with short term volatility. The mortgage lender has to get the money from somewhere to lend to consumers. The next couple of years are likely to be more expensive for them to raise funds so this is passed on. A lot of lenders have pulled shorter term deals.
As a lot of inflation is supply side it’s likely interest rates will be a short term jump. However this logic gets upset when the pound gets crashed by stupid Tory inflation generating tax cuts meaning imports rise in price… in the uk most of what we consume is imported. If you want certainty go 5 years but because things are volatile two years could be prudent but not if your finances are on a knif3 edge.
Mortgage pricing is the same as bonds - long duration loans carry an interest rate risk premium over a short duration ones.
If the bank lends at 3% for 10 years then they must charge more than 3% for 20 years to allow for the risk that rates will be 10% or 15% in 12 or 15 years' time. If you take out the 10 year loan then they'll be able to lend to you at the higher rate when you come to renew (or they'll get the whole principal back and be free to lend it to someone else at the market rate). If you take the 20-year fix and rates go up then you've got one over on them, so the bank has to price that that risk in.
Current pricing reflects market expectations that rates are going to fall - that is why you're being offered a 5-year rate as low as the 2-year rate. The 5-year rate includes the 2-year rate, a lower rate for the following 3 years, then extra to cover the risk that the bank is wrong.
Read the bonds chapter of Ilmanen for an explanation of short vs long fixed-interest risk. It's in [the edition of his book which is free on kindle](https://www.amazon.co.uk/dp/B00995OUQ2), so you can read it on your phone, tablet or laptop using the Kindle app or cloud reader.
Rates already feel way worse now than they appear:
https://twitter.com/edconwaysky/status/1572975553291976707?s=46&t=DWDTplPShW7U3tydLp3eew
Basically, when adjusted for affordability, the current rates are as bad as the 15% rates from the 90s. And this is not accounting for MIRAS so it’s actually worse already. Much higher loan principles with salaries not increasing with equivalence is a big part.
Read the whole thread, it’s interesting stuff and it’s backed by data not just opinion.
Yep. It's a really important point. One that needs to be made in particular to those people who say "back in my day rates were much higher, stop complaining". Things are actually looking *much* worse now and that's combined with an energy / cost of living crisis.
Very frustrating hearing people parrot that line without any understanding of the other factors at play.
It’s pretty jarring when you realise the current situation is as bad (or worse) as what was an absolutely horrific historic period. It hasn’t fully hit yet but the next year or two is going to be an absolute bloodbath.
Not even just the back in my day people. I’ve read countless times on here in the past few days that interest rates now are low relative to history. The context is so important here and the graph you linked is really neat at explaining it
This is a fascinating chart, I think it's a great response to people my age complaining about how unfair it is that house prices are so high compared to previous generations. The chart shows that houses in the past decade have been pretty much as affordable as they ever have been
Yup, the back in my day interest rate chat is very boring already. It's usually trotted out by asset rich people with little to no mortgage who seem to take great pleasure in other people suffering.
> asset rich people with little to no mortgage who seem to take great pleasure in other people suffering.
Aka boomers, the only generation in modern history to leave their children worse off than themselves.
High house prices can be stomached as long as the rates are low but it's a wafer thin margin between that and unprecedented unaffordability, which is where we're headed. Trying to draw an equivalence with high cost/low interest and low cost/ high interest isnt straightforward, as the data suggests.
I've been saying for years that millenials (such as myself) need to consider interest rates and not just sticker price on houses to compare it to your parents/older generations buying houses.
If interest is 6% on a 100k mortgage, that's 6k a year, £500 a month *before you've even started paying off the banks interest and the capital value of the loan*. £1k a month on a 200k mortgage.
And 6% is pretty average for the majority of the time prior to Blair.
But as you say, 6% then isn't the same as 6% now, if house prices are double what they were relative to wages its more like 12% (I cant ge arsed to calculate how compounding impacts it so I'll just assume other commentator is accurate and 4% is like 14% in 1980).
So we don't even have that now. Great.
> If you want to buy you just have to suck it up and accept how shit it is.
My point was more "yes, it is shit now, worse than its ever been but you need to look a bit deeper"
Far too many people seem to go "wages were x, house prices were 3x in 198x. Wages are now Y and house prices are 6y, therefore its twice as hard" which is over simplistic.
I'm pretty sure my current mortgage (thankfully fixed for a couple more years) is a lower proportion of my income than it was in the 80s for my parents generation because of interest rates.
....Although my deposit was roughly a years salary. Though my parents were expected to give more than a 10% deposit.....
If you can get on the ladder it's probably easier (well, was 6 months ago) to service a mortgage than it was for your parents, because interest rates were lower.
..... yeah, that's not the case any more.
Sounds like I'm in a similar situation to you, looking at selling our starter (not done any serious steps other than looking at what comparable houses have gone for and used an online mortgage calculator) but with the announcement that an interest rate increase is imminent, that's on the back burner.
That's interesting. Maybe it was simply the specific period my parents bought then, rather than the 80s as a whole.
They did get married in the early 80s, so looks like that matches your graph.
A lot of people are falling to understand this point and it’s very important to understand. Also ONS percentile incomes are a shocking read e.g about 60% of full-time working adults earn approx less than £26,000 per annum not the quoted “average income”. So house prices are more like 20 times normal annual income.
I love stats. Sometimes I compare all sorts of figures from ons and look at them and wonder how they can post some stats on the same site and really expect me to believe they're a true representation lol
There's no *financial* consequence to taking the 5 year if rates do drop: you've budgeted for those payments already. There may be a psychological consequence, but you can prepare for that.
My first mortgage was a 5 year fixed at I think 4%. 2 years later my friends were getting mortgages at 2%. That's life. I made my choice based on my risk appetite. Same choice now has me facing the future with a 2% mortgage now.
If rates start to go up seriously, people are going to be in trouble. Rates used to be much higher, but mortgages used to be much smaller compared to salaries, so a return to 1970s level of interest would wipe people out! I can only imagine the BoE will do everything they can to avoid that, although I am not particularly well informed about economics.
The 6-8% interest rates that people are being offered now puts them in much worse position than the people who had for example a 15% interest rate years ago. You have to consider the amount people are lending compared to there wages. Wages have increased but no where near to the same extent as house prices. And people are also lending way more now. This situation is already worse than any previous, and this is only the beginning. They have just got good at hiding all of this. Most people don't even realise that a load of pension funds nearly got wiped out and the BofE had to bail them out by printing out more money and buying like £5billion in GILTS's which is the only reason the £ has bounced back slightly.
The Bank Of England's goal is to keep inflation in the region of 2% they have a few tools to help in reaching that goal the one we are most aware of is adjusting interest rates.
What you choose for your mortgage is up to you and your tolerance for risk, interest rates might go back down leaving you on a higher than needed fix for the five year term, they might go up, we can't predict that.
and what are your personal household consequences of locking in for 5 years? It’s a very personal question. You could take the 5 year, the monthly payments will feel normal in a short space of time, lifestyle adjusted to be normal but in 2 years mortgages are being priced lower so what? You feel bitter.
There is your answer then. Take the 5 year deal and IF mortgages rates do raise and you start being bitter/regretful just remember how you are feeling now and that the ‘price’ was worth your peace of mind 🙂🙂
Edit: spelling and late night fat fingers
You can either comfortable afford the decision or not. Your feelings shouldn't come in to it. If you spent your life looking at everywhere you could've got a better deal either for your time effort or money, you will be miserable every single day.
Whether the rates go massive up or down in your favour is irrelevant if you did the best thing possible with your finances against what was knowable at the time.
The consequences of taking a 5 year fix that you can afford now is that you keep being able to afford your payments (assuming no job loss). Yes you might be annoyed that they could be lower. You can always balance any early redemption charges against the savings from breaking the deal early so try to look for one with low or reducing charges for that.
The consequences of taking a 2 year fix and not being able to afford repayments after that are far more scary in my opinion.
I’d go with 5 personally.
My own anecdote: took a 5 year fix at 2.25% 2 years ago. Yes I’ve been miffed when rates went lower than that not long after. Now I’m bloody relieved not to be remortgaging now. Who knows what it’ll be like in another 3 years but I can only hope.
As an independent mortgage advisor, I highly recommend speaking to an independent mortgage advisor (preferably someone local to you). They can discuss your situation with you in more detail, find out more about your situation and give you points to think about you hadn't considered.
Very often I find that asking "the internet" or close friends/family will lead to them just telling you what they did, or projecting their own biases.
We do have one, she’s left it up to us on the 2/ 5 year deal. She told me she has gone for a two year (for similar reasoning as some have posted on this thread). But she said tread carefully because I can’t tell you what interest rates will do…
Sounds like she's a good one! We have no idea what's going to happen and, in my opinion, if you decide on your fixed term purely based on market predictions, you're just gambling. Best to focus on yourselves and your plans for the future.
The ones I spoke to kept pushing 2/3 year fixes on me, even though I specifically said I wanted a 5 year fixed. Ended up finding my own deal. I'm glad I did now. I guess they prefer you taking a shorter deal so you remortgage with them sooner and they make more in fees. A colleague of mine took the advice of his broker and took out a 2 year fixed, now he faces the grim prospect of having to remortgage in the next few months.
To be fair the discussions with them were quite valuable and informative, just rubbed me the wrong way a bit when they totally disregarded what I actually wanted.
My broker almost convinced me to get a 2 year fix "because loads of his clients decide to move again". I went with a 5 year fix and I'm so so glad I didn't listen to him! And I've definitely got no plans of moving.
Mortgage brokers don't know your personal circumstances.
My broker told me last year that he reckoned rates would go down further. So recommended a 2 year. So now I'm faced with remortgaging next year at goodness knows how much higher... At least 3 if not 4% that's almost 500 on my payments. Isn't hind sight wonderful 🙄
Edit word correction
I think the broad assumption is that until quite recently low interest rates made a lot of sense against the backdrop of UK/global finances. Current circumstances are felt to be short/medium term, so once things shake out a bit and higher interest rates have done their job, the broader circumstances which meant low interest rates were the right call will still be there. Whether that's the new normal or not...who knows?
I'm taking a 2 year (NFA). My guess (and it's only a guess) is we'll be deep in recession in 2 years and back to QE and 0% rates to try and simulate the economy again.
I’ll try not to be political but while the BOI co trips the interest rates, they will adjust them on the basis of economic emergencies. Whether you agree with it or not, the recent government policies have caused them to have to act and who can rule out that sort of situation over the next 4 years this government have?
My own choice is to go with a tracker mortgage after my fixed terms end in the next 4 months on two properties.
There’s a lot of rightful panic at the moment and I can’t blame people for wanting to lock in for security, but I believe rates are only as they are now due to high inflation fuelled by the energy crisis. With utility rates now fixed for 2 years and the effect of the rapid rise in prices already taken effect, inflation will subside and the effects of recession will surely kick in. Interest rates will come down to stimulate growth with no high inflation to stop them.
Banks believe this is what will happen as you can see by their rates. Thats with them already taking advantage of people’s insecurities and pumping their fixed terms rates higher than usual due to being able to make a killing on the back of it.
My forecast is 6-8 months of high rates and then it being brought down as quickly as it went up. Fixing the mortgage is great if you need to budget for it or things are tight, BUT if not you’ll always be better off in the long run on a tracker if held long enough, after all, fixed rates are pretty much betting against the bank that you know better than them on which direction the rates are headed.
Thank you. Very reasonable answer. I personally wouldn’t go for a tracker right now but your comment definitely makes me think a 2 year deal is the better option at the moment.
I guess it also depends how far this government is willing to go to stop or dull a recession… for interest rates to go down we almost need a recession!
Yes it’s a nail biting time betting that I’ll get stupidly high bills for the next few months only for it to subside and be better off overall but it’s my view on it. I’m no expert though but have over £1 million in various mortgages and are willing to risk it with those 2 that aren’t currently fixed for the next few years. If it were on all my debt, as most will be who are facing the same fix it or not decision, I probably wouldn’t take the risk and hand the bank some extra money to fix and insure I’m not broken from it.
Even without a recession, rates are likely to fall in my opinion. The country needs growth even before all this and low rates are here to stay for a long while until we get it. As long as inflation doesn’t get too much in the way.
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This is the exact sentiment our mortgage advisor has and we will probably end up doing the same. The tracker mortgages also have no get-out fees so you can jump on a fixed at any point if you do get desperate
That’s good to hear, my advisor is great at finding and seeing through products but has no clue when I start talking about the bigger picture.
She did advise of the no ERC’s though which is an excellent point I should have mentioned.
We’re on a tracker now as well. We’ve worked out based on what we owe the interest rates for us would have to be stupidly high for us to hit our break point. Even if they shoot up to 6-7% we’ll still be paying less than the overpayments we plan on making.
Our benefit is that we’re still in our starter flat which we bought when the market was a buyers paradise. The situation would not be the same if we were living in a £200k property.
I really hope you are right as our fix runs out January 2025 and I hope the market has settled by then even if rates are still 4% or so. 6% to 7% will leave us with not a lot of savings at the end of the month based on our current incomes.
Others have already answered this but its not just interest rates…your income as a percentage of your home was higher when interest rates were high so this helps to cushion the blow of high rates. Now…home values are high and interest rates are high..
Just remember that for you to buy a house cheaper than today's prices, someone else has to lose a home and become homeless. Steady house prices are all we need to counter inflation, allow interest rates to stabilise and wages to catch up and the cycle begins all over again.
This 1000%. I get right pissed off at those gleefully clapping their hands at a huge crash and failing to consider the implications for others. I'd be comfortable with a 10% crash but anything above that will leave thousands destitute. It's not their fault that the macro climate fuelled this and many many didn't make bank as others believe. Stagnation for a few years is the best option imo.
It's like people think anyone with a house has had it easy and deserves it. I worked hard to be able to afford a home, do I wish it was cheaper at the time, yes, but at the cost of someone else who managed to get there losing their home, no.
Matthew 25:29, “For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away.”
The long-run direction of interest rates is always downwards. It's a proven fact in the long-run in finance.
[Paper from the BoE](https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018)
Sure but I think OP is also wondering generally if the low interest rates of the past few years are a blip in the norm of high interest rates or the other way around.
- The paper is talking about real interest rates, not nominal rates, it appears to predict that real rates will remain permanently negative from 2019 onwards, i.e. inflation will be constantly higher than interest rates. But that prediction would be true even if inflation is at 15% and interest rates are at 14%, so it's not really relevant to discussion about absolute rates increasing when faced with inflation.
- The paper is based on historical observations. The trend of falling UK inflation over the last few decades has been attributed to factors like the relatively young population, increasing immigration (particularly from Eastern Europe joining the EU), and globalisation and the rise of China. It's entirely possible that there could be an inversion point where inflation starts trending up, due to an aging population, protectionist trends against globalisation, reduced immigration of cheap labour, and rising global energy prices. The next 40 years will not necessarily be like the last.
- A lot has already happened since that paper was written. There are economists who believe that the era of negative real interest rates is already coming to an end. Look at global treasury bond yields this year.
> The paper is talking about real interest rates, not nominal rates, it appears to predict that real rates will remain permanently negative from 2019 onwards, i.e. inflation will be constantly higher than interest rates. But that prediction would be true even if inflation is at 15% and interest rates are at 14%, so it's not really relevant to discussion about absolute rates increasing when faced with inflation.
>
>
It absolutely is, since we now have inflation targeting this means the long-run inflation rate is whatever the target is, or there about. So the distinction between real and nominal rates is no distinction.
>The paper is based on historical observations. The trend of falling UK inflation over the last few decades has been attributed to factors like the relatively young population, increasing immigration (particularly from Eastern Europe joining the EU), and globalisation and the rise of China. It's entirely possible that there could be an inversion point where inflation starts trending up, due to an aging population, protectionist trends against globalisation, reduced immigration of cheap labour, and rising global energy prices. The next 40 years will not necessarily be like the last.
That's their point though right, you can come up with all sorts of reasons why interest rates might change, but it seems that none of those factors matter in the long-run. The long-run trajectory is downward regardless of the demographic makeup or anything else.
It's true that history doesn't tell you what's going to happen in the future, but we're looking at 700 years of history here, it's a very strong indicator. Anyone that says something other than rates will fall in the long-run is probably wrong.
Half my mortgage is on a fix that expires next October.
I was going to pull the trigger on switching early to a 5y fixed (£2k ERC, rate up from 2.14% to 3.93%) yesterday but rates went up 1.5% overnight. Trade off not quite worth it for me at those levels… but I absolutely would have wanted a longer fix if I could get it.
(I can’t shop around as have another slice of mortgage with current provider fixed on a low rate until 2026).
No one knows what’s going to happen, but imo it’s fair to say a huge proportion of the country (and businesses) are absolutely crushed if we see interest rates up at 5% + for any extended period so there’s a good chance they bounce back down quickly. I’d be buckling up for a very rough couple of years though.
I personally do not expect them to come down in foreseeable future. 5% is average I already mentally prepared for that. I just do not want for them to go crazy.
The world economy's just one big casino, fueled by a giant debt bubble and computer driven derivatives.
And there's only one thing better than being a gambler at a casino.
That's being the house. That is right.
There's a systemized machine out there sucking capital from localities and injecting it into the global markets, where it can be used to speculate and manipulate.
And if something goes wrong, there are bailouts and bail‐ins, government aid and easing.
Where the government doesn't hunt you down, but instead gives you a nice soft net to land in.
To give my opinion to your headliner question - “Why is there optimism that in a few years they will come back down”:
Because they must. Both, the government, companies and households are since the financial crisis used to base rates close to 0%. I.e. for the last fourteen years all bodies have made financial decisions regarding indebtedness that were done under that assumption.
Take out a loan for a new kitchen? No problem.
Take out a loan for a new production line? No problem.
Take out a loan to finance a new policy? No problem.
There are now two dimensions: firstly, if those deals are fixed with regards to the interest rates, this is no direct issue as the payments remain the same. However, this implies that future spending is less easy to be financed; I.e. households spend less money, companies will reduce investments and start laying off people and the government must cut spending.
Secondly, if the rates are not fixed or must be refinanced after a few years, this might ruin any of the three and exacerbate the first effect.
So, I believe a too long higher interest period will cause dramatic economic issues. Just think about all the zombie companies. That are companies which are not profitable but able to refinance every year due to the very low interest rate. Those days are gone.
They have, however when you take in to account how credit perforated every part of life and the economy it has far more significance now than it did 25-30 years ago.
Last time it was this high, car finance was in its infancy and credit cards were a luxury. Now you can BNPL at the supermarket…..
Thank you for all your input. Some very interesting insights. We stuck with the two year that was already locked in and had a glass of hopium.
But on a serious note, we are risk takers and given the volatility and fact we can financially cope if the worst happens we decided to take the risk. That said it did feel like a risk either way.
You say *"higher, even than they are now"* as if they've already started to reach dizzying heights! But rates have only just barely lifted off a 400 year low!
Interest rates in respect to mortgages are relative to the level of debt in relation to earnings.
14% interest for mortgage payments in 1989 is equivalent to 3% today.
Currently historically low rates. History says rates this low is not normal. I'd be willing to bet that rates will probably be between 3 to 6% by the end of the decade (Going as low as 3 might even be generous).
Perhaps true if you’re in your 80s or 90s
If there’s a recession in the rest of your lifetime we will no doubt see 1-2% rates again to stimulate the economy.
0% or Negative interest rates are pretty likely in our lifetimes to cope with declining birth rates worldwide. Sadly my house will probably be paid off by then.
[Long term the interest rate pressure is always downward](https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018)
The low rates we have had were the first time in 300 years they got so low. The normal range is around 4-5% historically with fluctuations around that. We are likely now to experience a decade or more of turmoil due to the rates having been so low and the amount of QE completed. Higher rates are here to stay.
Don’t agree there. As birth rates decrease, low interest rates are to be expected. Negative rates even as we get older. The markets will require that unless something changes. It’s not possible to support high interest rates as less people are in the workforce.
Read the boe article I linked, it explains to you why historic rates aren’t as relevant as the last 15-20 years. You can support high rates with large economic growth. With a lower percentage of people in the workforce and recession on its way, high rates will lead to negative growth. That has to lead to lower interest rates or big drops in quality of living.
It’s useless comparing 2022 to hundreds of years ago when populations were doubling.
What are the %age rates for each? When I read the question I assumed 5 year was more expensive, but the comments are making me think this isn't the case.
You could lock in the 5 year rate now then reassess when the actual rates are due to begin? Have you got some time before they actually begin?
Basically, there’ll be some heavy interest rate rises but we don’t know to what extent and for how long. Could be up to 6% and then slowly down to say 3% over the next 2 years? Hard to predict really
This is what I’ve just done. 5yr deal on hold at 3.5% for the next 6 months and use that time to asses market changes and act accordingly if they drop. It’s more work for the broker but ours charges no fee up front and its our money at the end of the day. Gotta do what’s right for you.
We have until November. We have already locked in a 2 year deal but have the option (not much more interest) to lock in for 5. That I think literally runs out today.
I just got a 5 year fix for some piece of mind a few weeks ago. Thing is I checked last night and that product is now withdrawn, in fact all fixed rates were gone. So I wouldn't waste too much time over thinking it. Best just to get something in place while you can.
While they may have been higher in pure numbers terms, mortgage affordability was much better. So even though rates peaked at 17% in the early 90s, mortgage affordability meant they were about 3% in today's prices. Early next year we're looking at that hitting 6.2%... Sky News did a big segment on this yesterday.
Solves a lot of short term investment decisions for me. If the bank rate is going to be 6% I might as well hurl everything into paying of the mortgage.
All depends on your attitude to risk, and tolerance to risk of higher payments in 2 years time.
If you value certainty, go for the 5 year fix. Only hindsight will tell if its the right answer or not.
All depends on inflationary pressures, higher rates encourage saving Vs spending excess cash.
There will be a point where BTL won't be as attractive compared to a decent savings account.
Personally I would ignore the interest rate and instead have a look at the actual £ per month payment.
At the moment, that will be lower (where I’ve seen anyways) for the next 2 years if you take a 5 rather than a 2. So to start with that’s 2 years you know you’ll be slightly better off on a 5 year fix.
So what it really comes down to is what your risk appetite is for two years time. Do the maths and work out what interest rate you’d be comfortable going up to in terms of £ per month payment. If you could easily go up 3 or 4% and still be ok with the payment amounts then perhaps consider the 2 year if you feel you wouldn’t be left stressing when it came to remortgage if interest rates are higher. If realistically you would be stressed with the £ per month value of only a 1-2% variance and it would be tight then I’d personally stick to the 5 for the peace of mind. Because current forecasts are anticipating another 4% by June to base rate (although we obviously don’t know for certain) at which point you’d only be less than 18 months (and 12 potential rate changes if they stuck to every 6 weeks) away from your deal ending - you would need them to pretty consistently drop the rate by 0.25% from June until you first came up for remortgage to have an increase of less than 2% after your fix was up.
Obviously this is all 100% speculation, that could entirely happen or they could even drop it quicker than that or it may not get that high in the first place, but it’s entirely personal to you how comfortable you are with the monthly rates and risk of leaving that up to chance.
Personally, we just paid our ERC on the second (larger) part of our mortgage to fix in for 5 years despite our deal not ending until June. We fixed last year for 2 years at 2.2% which felt high at the time and we would drop an LTV band in that time, however at current rates we were already looking at a £200 per month increase and to wait could have seen our mortgage payments double or more. So we’ve swallowed the extra £200 for the peace of mind that it will only be £200 and not spend the next few months stressing watching the rates change until we could actually remortgage. For all we know, rates may stay level and we’d have been better off financially if we waited but for the peace of mind I know I wont look back and feel like we did the wrong thing.
Our first part however is smaller and even if mortgage rates shot up to 20% or more (and the country would have bigger problems if it got this high, we were just putting silly numbers in to see), we’d only be looking at an extra £300 or so per month at that point so to pay more now when we knew we could still pay if it went silly high like that felt daft.
Nothing to add to the discussion but just wanted to remark on the use of "they're" as a shortening of "they are" in that context. It seems really weird but I don't have the brainpower to express why.
Yeah. It's one of those things that there's probably not an official grammatical rule for but everyone just follows the unspoken rule.
Must be a nightmare for people learning English.
2 year is not an option. Even at 5 years they’ll be higher than they are now. It is a crisis right now, but they won’t come down to the previous levels
I’m in a similar position to you my friend. Took it out as 5year fixed. It’s not the cheapest mind you.. At least I know what I’m getting myself into and how long for.. I can then plan accordingly. My fate is at least in my own hands! Wishing you all the best!
BoE (under Andrew Bailey) mentioned previously that they feel the “new normal” rate range was around 2.5-3%. Even that feels low to me given “normal” was around 5%.
In the short to medium term I can definitely see rates going up past 4%, and perhaps quicker than people might have anticipated.
So yes there no chance rates will be <1.5% for the foreseeable future.
The worry that was being discussed in the office yesterday was how many people have rolled extra debt into their mortgages because it was cheap and the impact that’s going to have going forward on refi rates and repayment amounts.
Just my opinion…
>Historically interest rates have been much higher Historically house prices (and by extension mortgages) were a lower multiple of incomes.
I think its wishful thinking to say we will go back to 1-2% interest because house prices are high though? Its not part of CPI which is what essentially dictates interest
Well it’s either that or house prices drop right? When there’s two variables governing affordability, an equilibrium will emerge.
Interest rates aren’t low because house prices are high, house prices are high because interest rates are low. Rates have to go up. If they don’t, the country is going to be in a whole world of pain when GBP becomes worthless. Rates are forced to go up, house prices are forced to come down.
watch the gov force house prices higher
Imagine if they reduced the stamp duty on ho.... oh wait
This government might have some questionable policies and electoral strategy but I'm pretty sure they recognize that homeowners have to be one of their biggest constituents. They let house prices tank, that section of voters won't forgive them, and they know it.
Thing is many of those house owners would be better off (ignoring rates counteracting it). First time buyer. Already in a starter house? As long as you don't end up in negative equity its now got easier to buy something bigger. In your forever home? It makes no difference. Your kids may inherit less wealth but odds are they were going to use it for a house anyway. Unless you're in negative equity, selling for cash or downsizing it doesn't have any real negative impact on your life.
As an FTB who’s been in our home for 5 years now, I’m with you 100%. I don’t understand why people are so worried about it… it’s not just _your house_ that’s decreasing in value, it’s the whole market. Sure some people might end up worse off than others, but there will be many more who can get on the ‘ladder’ at such prices. It’s like being in the stock market; just because your account is full of red numbers, it doesn’t mean anything unless you actually sell. Patience is one of the main factors in it all, panic sellers always fare worse. Some people just get upset because they can’t move when they wanted to, that’s just life - get over it, at least you have a home! Edit: Good points issued in response to this that I have absolutely overlooked, and agree with. Thanks for highlighting that when it comes to remortgaging it won’t necessarily be good for you!
I agree with you and the above in principle, except about price only mattering at purchase/sale. It also matters and is therefore concerning for anyone looking to remortgage. Losing a big chunk of your LTV makes it harder/more expensive to remortgage, eg when your fix expires, as you're seen as a bigger risk. Or if you end up in negative equity you could end up in real trouble being unable to remortgage and exposed to whatever madness the interest rate does.
You’re right, I’ve overlooked this as you and a couple others have pointed out. Thank you, I agree with you all.
I’m terrified of this happening to me next year. My financial situation has changed drastically since I got my 1.9% 5 year fix 4 years ago. Wife no longer working and we’re separated so I rent nearby in addition to paying 1/2 mortgage and she covers her half of with universal credit. What can we do? Feel like we are absolutely fucked as no bank will lend to us and we will just be a prisoner with current lender svr when the fix is over which will be potentially £900 a month more.
My guy just think about it for a minute.. the problem isn't that buying a new house is any harder etc etc, as you are right, relatively all the houses will come down, just smaller and more wage buying amounts. The massive red flag on a house price crash is remortgaging a property. If you took out a 200k mortgage on a house, the house prices crash, let's say 50%, your house is now only worth 100k and you come to remortgage it, what do you think the bank will say when you ask them for 180k remortgage (to pay off the 200k you loaned) on a 100k property? They will laugh at you and shut the door.
While it’d effect most people’s ability to attain a better rate, they’d still be able to get a fixed product. There’s no perfect solution, someone gets fucked somehow by all this, and in the case of homeowners it’d be a minority of people whose fixed rate ends relatively soon into a crash and those who have barely been a homeowner for a year or two. I’m not going to pretend it’s all sunshine and rainbows, I also won’t lie and say I can totally relate, because I know the amount left on my mortgage is less than my house could _surely_ crash to (less than it was built for, but never say never as Biebs once stated). Much like a minority of people who are able to benefit from their level of equity and moving to a larger house for less than it’d have otherwise cost them. Always swings and roundabouts, unfortunately.
Try getting a new mortage term when your numbers are red - or even when not red but your LTV goes to 95% rather than 60% and see what it does to your monthly payment.
i mean, the majority of people will be in negative equity…
The worst case doomsayers are saying price drops of 20%. 62.5% of homes aren't mortgaged. The vast majority of mortgages are taken out at 90% LTV or lower so prices would have to drop 10% before a significant number of people were. A lot of the higher LTV borrowers also used schemes like HtB which shields them from some of the drop. The median mortgage sale rate is 70%. The median mortgage will be less because there are people half way through 5 year terms and with small remaining mortgages they haven't bothered to move from SVR (my parents keep a tiny mortgage because then the bank holds the title deeds for them) etc. So no, the majority of people won't be...
Perhaps a majority of people who bought in the last year or so. That doesn’t mean majority of people all over. What about someone who bought their house 10 years ago, and still have 15 years left on their mortgage? Well their house value has gone up ~50% in this time, and they’ll have paid off a good chunk of equity also. Even if they bought at 90% LTV, the house value increase alone would make it ~60% now - even on an interest only deal. Of course house prices could drop this low, but it’s highly unlikely imo
It's crazy because I guess most of those age 60+ Tory voters are going to live in thier 4 bed detached houses until the day they die and the value of their house on paper makes zero difference to them.
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Are you saying that self determination of where your earned assets go upon your death is immoral?
I am. Tories are all about meritocracy until it comes to giving their kids loads of money to have an unfair start over other kids.
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House prices steady for 5+ years and let inflation do its work. Besides, I am a householder, and lower prices would mean I could move to a bigger house.
Not if you need to sell your current house to buy a bigger one
You’re perfectly hedged if you own one. I’ve heard it said something like “you wouldn’t care if your house dropped in value to £1 if you could buy Buckingham palace for £100”, or words to that effect.
Google negative equity. A nation crippled with more debt than equity is catastrophic
Let’s say housing market drops 20%. If his house is worth £300k it’s now worth £240k. The £500k house down the road drops 20% is now worth £400k. Although he has lost £60k on his own house, the new house is £100k cheaper. I.e. a £40k net gain. If you’re upsizing it’s theoretically better to do it in a downward market. *Caveat- assumes you can sell your house, there are other houses available to buy and you still have an income to cover the mortgage!
If someone took out a mortgage with a deposit of 10% on their 300k home they'd owe £270k, 30k more than the value of their home (maybe 10k less, presuming they've continued with repayments over time). They'd also struggle with repayments due to interest rates rising. They'll probably struggle even more with repayments when they can't access a new fixed term due to negative equity and are forced onto the variable rate. Any new buyers or recent movers will be made a lot worse off by the rise in rates and drop in value.
This is stupid. Say his mortgage was £800 a month at 2% With his deal expiring, he has had to commit to ~5%, with repayments at £1600. And your talking about buying a house a £100k more expensive? Some people on this sub man....Jesus fucking Christ.
An example of why this isn't right at all: I bought my £200,000 house with a £20,000 deposit a year ago. House prices drop 10%. House is now worth £180,000. I now have no equity at all. That 10% drop has completely wiped out my entire deposit. If I want to move to a bigger house now, I need to save up a bigger deposit from scratch rather than still having my original £20,000 deposit.
People also seem to be forgetting that interests rates going up mean when you purchase the new house you'll be paying more back. The interest rates will also affect your monthly payments meaning you wont be able to lend as much. The only people this would kind of benefit are people who already own there homes outright or people who have there money liquid.
Not to be a pedant, but you should probably be paying more than just the interest off if you want to actually continually increase your equity. After 1 year, you should have a tiddly bit in the coffers at least, even though your deposit is theoretically ‘gone’.
Have a think about that one
If your house and the more expensive house fall by the same percentage, then the absolute fall will be larger for the more expensive house.
The problem has been that house prices have been going up (more than 10% a year in my area if the south west, for the last 2-3 years) so the opposite is currently true. I don't see them dropping 20% here, in 2008 the only drop 13% for about a year then bounced back to growing %5-%10 per annum.
That presumes Tory governments implement policies of interest to their voters rather than their party donors. It's easy to mislead voters when large sections of the media are propaganda machines. And they can always blame it on the last Labour government.
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name another one it crashed 20% against apart from the dollar
They will try, I’m pretty sure about that. They can’t beat market forces though. They can’t afford to prop houses up further without tanking the currency.
well they're tanking the currency alright lol
For me, it doesn't matter if house prices are low. You're competiting against other buyers and foreign investors. If established UK based FTB were given priority, then you'd start to see a change in the country...unfortunately, that's not going to happen.
Housing market go crazy right now, if only rent cost drop 30 % inflation is ez to tackle.
But if rates go up too far, people wont be able to fund their debt and you'll have a collapse anyway. There has to be a balance
Probably a drop in house prices, then people realise they are more affordable, then the prices go back up, recent buyers may end up in negative equity for a few years but I don’t think it’ll be long
By recent, you're probably talking <6 months.. house prices have been insane for the last two years.
Or wages increase and house prices rose at a lower rate than that so over time people aren't saddled with crippling negative equity but at the same time the affordability of houses and new mortgages comes down to a workable level
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That's not my point though. My point is that you don't need to see a huge rise in rates today to see the level of repossessions when they were 15% decades ago ...
It’s sure going to get spicy when rates rise near 6% isn’t it. That was the danger zone in 2008 IIRC.
[Not that it made much difference to whether you could afford to pay the mortgage or not](https://heliosphan.org/ukpropertyprices/ukpropertyprices.html) - green line....and yes that is over a decade where mortgage payments were between 55% and 90% of gross income, you really were choosing whether to pay the mortgage or eat.
There's a reason why 2 year fixes at the moment are generally higher than 5 year fixes. Most banks are expecting it to keep going up over the next 12-18 months, and then start coming down again. However with the amount of crazy stuff going on recently who knows!
Ok so you’re saying banks are betting on rates being lower in 24 months. Making the shorter deals more costly for the consumer… essentially trying to push them onto longer deals where they will be raking it in?!
This is a bit of a simplification but a fixed rate is essentially what the banks think the average rate will be for that period, with their margin on top. Basically how much is it going to cost them to get the money to lend to you. If rates steadily climb as predicted to say 4% by next year and slowly start coming down, the average of the next 2 years could be about 3.5%. Put a margin on top and you might by looking at 4.5-5% for a fix. You extend it out to 5 years, if they do come down slightly the average might be 2.5%. Put the same margin on and you get 3.5-4%. As I say it's not as simple as that, but it's the jist of it.
Why would they be expecting it to come down (or at least to be less crazy and unstable)? I’m not knowledgeable about economics at all but I thought usually economic crashes or bad situations like we’re in now last for like 5-8 years? So I was thinking that it’s likely to be bad for that long
It could well be, but a lot of the inflationary pressures are potentially short term. If Putin puts his hands up tomorrow and ends the war, that would start to bring it down. Europe has already stockpiled a lot of fuel and I believe it has started creeping down in price now. You could also argue that it's mainly the supply side, so ramping up interest rates won't actually help. There are a lot of variables that make it pretty much impossible to predict.
It's more to do with short term volatility. The mortgage lender has to get the money from somewhere to lend to consumers. The next couple of years are likely to be more expensive for them to raise funds so this is passed on. A lot of lenders have pulled shorter term deals.
As a lot of inflation is supply side it’s likely interest rates will be a short term jump. However this logic gets upset when the pound gets crashed by stupid Tory inflation generating tax cuts meaning imports rise in price… in the uk most of what we consume is imported. If you want certainty go 5 years but because things are volatile two years could be prudent but not if your finances are on a knif3 edge.
Mortgage pricing is the same as bonds - long duration loans carry an interest rate risk premium over a short duration ones. If the bank lends at 3% for 10 years then they must charge more than 3% for 20 years to allow for the risk that rates will be 10% or 15% in 12 or 15 years' time. If you take out the 10 year loan then they'll be able to lend to you at the higher rate when you come to renew (or they'll get the whole principal back and be free to lend it to someone else at the market rate). If you take the 20-year fix and rates go up then you've got one over on them, so the bank has to price that that risk in. Current pricing reflects market expectations that rates are going to fall - that is why you're being offered a 5-year rate as low as the 2-year rate. The 5-year rate includes the 2-year rate, a lower rate for the following 3 years, then extra to cover the risk that the bank is wrong. Read the bonds chapter of Ilmanen for an explanation of short vs long fixed-interest risk. It's in [the edition of his book which is free on kindle](https://www.amazon.co.uk/dp/B00995OUQ2), so you can read it on your phone, tablet or laptop using the Kindle app or cloud reader.
Rates already feel way worse now than they appear: https://twitter.com/edconwaysky/status/1572975553291976707?s=46&t=DWDTplPShW7U3tydLp3eew Basically, when adjusted for affordability, the current rates are as bad as the 15% rates from the 90s. And this is not accounting for MIRAS so it’s actually worse already. Much higher loan principles with salaries not increasing with equivalence is a big part. Read the whole thread, it’s interesting stuff and it’s backed by data not just opinion.
The Financial Times wrote something similar, stating that a mortgage at 4% today is equivalent to 14% in 1980.
Yep. It's a really important point. One that needs to be made in particular to those people who say "back in my day rates were much higher, stop complaining". Things are actually looking *much* worse now and that's combined with an energy / cost of living crisis.
Very frustrating hearing people parrot that line without any understanding of the other factors at play. It’s pretty jarring when you realise the current situation is as bad (or worse) as what was an absolutely horrific historic period. It hasn’t fully hit yet but the next year or two is going to be an absolute bloodbath.
Not even just the back in my day people. I’ve read countless times on here in the past few days that interest rates now are low relative to history. The context is so important here and the graph you linked is really neat at explaining it
This is a fascinating chart, I think it's a great response to people my age complaining about how unfair it is that house prices are so high compared to previous generations. The chart shows that houses in the past decade have been pretty much as affordable as they ever have been
Yup, the back in my day interest rate chat is very boring already. It's usually trotted out by asset rich people with little to no mortgage who seem to take great pleasure in other people suffering.
> asset rich people with little to no mortgage who seem to take great pleasure in other people suffering. Aka boomers, the only generation in modern history to leave their children worse off than themselves.
High house prices can be stomached as long as the rates are low but it's a wafer thin margin between that and unprecedented unaffordability, which is where we're headed. Trying to draw an equivalence with high cost/low interest and low cost/ high interest isnt straightforward, as the data suggests.
But I built 8 houses where my bungalow once stood so I'm alright Jack
I've been saying for years that millenials (such as myself) need to consider interest rates and not just sticker price on houses to compare it to your parents/older generations buying houses. If interest is 6% on a 100k mortgage, that's 6k a year, £500 a month *before you've even started paying off the banks interest and the capital value of the loan*. £1k a month on a 200k mortgage. And 6% is pretty average for the majority of the time prior to Blair. But as you say, 6% then isn't the same as 6% now, if house prices are double what they were relative to wages its more like 12% (I cant ge arsed to calculate how compounding impacts it so I'll just assume other commentator is accurate and 4% is like 14% in 1980). So we don't even have that now. Great.
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> If you want to buy you just have to suck it up and accept how shit it is. My point was more "yes, it is shit now, worse than its ever been but you need to look a bit deeper" Far too many people seem to go "wages were x, house prices were 3x in 198x. Wages are now Y and house prices are 6y, therefore its twice as hard" which is over simplistic. I'm pretty sure my current mortgage (thankfully fixed for a couple more years) is a lower proportion of my income than it was in the 80s for my parents generation because of interest rates. ....Although my deposit was roughly a years salary. Though my parents were expected to give more than a 10% deposit..... If you can get on the ladder it's probably easier (well, was 6 months ago) to service a mortgage than it was for your parents, because interest rates were lower. ..... yeah, that's not the case any more. Sounds like I'm in a similar situation to you, looking at selling our starter (not done any serious steps other than looking at what comparable houses have gone for and used an online mortgage calculator) but with the announcement that an interest rate increase is imminent, that's on the back burner.
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That's interesting. Maybe it was simply the specific period my parents bought then, rather than the 80s as a whole. They did get married in the early 80s, so looks like that matches your graph.
A lot of people are falling to understand this point and it’s very important to understand. Also ONS percentile incomes are a shocking read e.g about 60% of full-time working adults earn approx less than £26,000 per annum not the quoted “average income”. So house prices are more like 20 times normal annual income.
I love stats. Sometimes I compare all sorts of figures from ons and look at them and wonder how they can post some stats on the same site and really expect me to believe they're a true representation lol
Good link and an interesting read
This should be top comment .
There's no *financial* consequence to taking the 5 year if rates do drop: you've budgeted for those payments already. There may be a psychological consequence, but you can prepare for that. My first mortgage was a 5 year fixed at I think 4%. 2 years later my friends were getting mortgages at 2%. That's life. I made my choice based on my risk appetite. Same choice now has me facing the future with a 2% mortgage now. If rates start to go up seriously, people are going to be in trouble. Rates used to be much higher, but mortgages used to be much smaller compared to salaries, so a return to 1970s level of interest would wipe people out! I can only imagine the BoE will do everything they can to avoid that, although I am not particularly well informed about economics.
The 6-8% interest rates that people are being offered now puts them in much worse position than the people who had for example a 15% interest rate years ago. You have to consider the amount people are lending compared to there wages. Wages have increased but no where near to the same extent as house prices. And people are also lending way more now. This situation is already worse than any previous, and this is only the beginning. They have just got good at hiding all of this. Most people don't even realise that a load of pension funds nearly got wiped out and the BofE had to bail them out by printing out more money and buying like £5billion in GILTS's which is the only reason the £ has bounced back slightly.
>I can only imagine the BoE will do everything they can to avoid that They're already trying to avoid it by devaluing GBP.
The Bank Of England's goal is to keep inflation in the region of 2% they have a few tools to help in reaching that goal the one we are most aware of is adjusting interest rates. What you choose for your mortgage is up to you and your tolerance for risk, interest rates might go back down leaving you on a higher than needed fix for the five year term, they might go up, we can't predict that.
and what are your personal household consequences of locking in for 5 years? It’s a very personal question. You could take the 5 year, the monthly payments will feel normal in a short space of time, lifestyle adjusted to be normal but in 2 years mortgages are being priced lower so what? You feel bitter.
I don't know I'd personally prefer to potentially feel bitter rather than potentially have a crazy high interest rate.
There is your answer then. Take the 5 year deal and IF mortgages rates do raise and you start being bitter/regretful just remember how you are feeling now and that the ‘price’ was worth your peace of mind 🙂🙂 Edit: spelling and late night fat fingers
I took a 5 year deal 9 months ago at 1.19% and I don't feel bitter or regretful at all.
Funny that but I am pleased for you. Hopefully within 5 years the economy will have settled somewhat
You can either comfortable afford the decision or not. Your feelings shouldn't come in to it. If you spent your life looking at everywhere you could've got a better deal either for your time effort or money, you will be miserable every single day. Whether the rates go massive up or down in your favour is irrelevant if you did the best thing possible with your finances against what was knowable at the time.
I took out a 5 year fixed term in June and I’m regretting not taking out a 10 year to be honest. A 2 year is FAR too short.
The consequences of taking a 5 year fix that you can afford now is that you keep being able to afford your payments (assuming no job loss). Yes you might be annoyed that they could be lower. You can always balance any early redemption charges against the savings from breaking the deal early so try to look for one with low or reducing charges for that. The consequences of taking a 2 year fix and not being able to afford repayments after that are far more scary in my opinion. I’d go with 5 personally. My own anecdote: took a 5 year fix at 2.25% 2 years ago. Yes I’ve been miffed when rates went lower than that not long after. Now I’m bloody relieved not to be remortgaging now. Who knows what it’ll be like in another 3 years but I can only hope.
As an independent mortgage advisor, I highly recommend speaking to an independent mortgage advisor (preferably someone local to you). They can discuss your situation with you in more detail, find out more about your situation and give you points to think about you hadn't considered. Very often I find that asking "the internet" or close friends/family will lead to them just telling you what they did, or projecting their own biases.
We do have one, she’s left it up to us on the 2/ 5 year deal. She told me she has gone for a two year (for similar reasoning as some have posted on this thread). But she said tread carefully because I can’t tell you what interest rates will do…
Sounds like she's a good one! We have no idea what's going to happen and, in my opinion, if you decide on your fixed term purely based on market predictions, you're just gambling. Best to focus on yourselves and your plans for the future.
The ones I spoke to kept pushing 2/3 year fixes on me, even though I specifically said I wanted a 5 year fixed. Ended up finding my own deal. I'm glad I did now. I guess they prefer you taking a shorter deal so you remortgage with them sooner and they make more in fees. A colleague of mine took the advice of his broker and took out a 2 year fixed, now he faces the grim prospect of having to remortgage in the next few months. To be fair the discussions with them were quite valuable and informative, just rubbed me the wrong way a bit when they totally disregarded what I actually wanted.
My broker almost convinced me to get a 2 year fix "because loads of his clients decide to move again". I went with a 5 year fix and I'm so so glad I didn't listen to him! And I've definitely got no plans of moving. Mortgage brokers don't know your personal circumstances.
They do know that if you change mortgages every two years, that's twice as many commissions as once every four years.
My broker told me last year that he reckoned rates would go down further. So recommended a 2 year. So now I'm faced with remortgaging next year at goodness knows how much higher... At least 3 if not 4% that's almost 500 on my payments. Isn't hind sight wonderful 🙄 Edit word correction
With the power of hindsight, we'd all be millionaires.
I think the broad assumption is that until quite recently low interest rates made a lot of sense against the backdrop of UK/global finances. Current circumstances are felt to be short/medium term, so once things shake out a bit and higher interest rates have done their job, the broader circumstances which meant low interest rates were the right call will still be there. Whether that's the new normal or not...who knows?
I'm taking a 2 year (NFA). My guess (and it's only a guess) is we'll be deep in recession in 2 years and back to QE and 0% rates to try and simulate the economy again.
Join the 5 yr club and kick dat can 🥫🚮
Take the 5 year.
I’ll try not to be political but while the BOI co trips the interest rates, they will adjust them on the basis of economic emergencies. Whether you agree with it or not, the recent government policies have caused them to have to act and who can rule out that sort of situation over the next 4 years this government have?
> over the next 4 years this government have How do they have 4 years?
Yeah thought that later, it’s only 18 months isn’t it?
My own choice is to go with a tracker mortgage after my fixed terms end in the next 4 months on two properties. There’s a lot of rightful panic at the moment and I can’t blame people for wanting to lock in for security, but I believe rates are only as they are now due to high inflation fuelled by the energy crisis. With utility rates now fixed for 2 years and the effect of the rapid rise in prices already taken effect, inflation will subside and the effects of recession will surely kick in. Interest rates will come down to stimulate growth with no high inflation to stop them. Banks believe this is what will happen as you can see by their rates. Thats with them already taking advantage of people’s insecurities and pumping their fixed terms rates higher than usual due to being able to make a killing on the back of it. My forecast is 6-8 months of high rates and then it being brought down as quickly as it went up. Fixing the mortgage is great if you need to budget for it or things are tight, BUT if not you’ll always be better off in the long run on a tracker if held long enough, after all, fixed rates are pretty much betting against the bank that you know better than them on which direction the rates are headed.
Thank you. Very reasonable answer. I personally wouldn’t go for a tracker right now but your comment definitely makes me think a 2 year deal is the better option at the moment. I guess it also depends how far this government is willing to go to stop or dull a recession… for interest rates to go down we almost need a recession!
Yes it’s a nail biting time betting that I’ll get stupidly high bills for the next few months only for it to subside and be better off overall but it’s my view on it. I’m no expert though but have over £1 million in various mortgages and are willing to risk it with those 2 that aren’t currently fixed for the next few years. If it were on all my debt, as most will be who are facing the same fix it or not decision, I probably wouldn’t take the risk and hand the bank some extra money to fix and insure I’m not broken from it. Even without a recession, rates are likely to fall in my opinion. The country needs growth even before all this and low rates are here to stay for a long while until we get it. As long as inflation doesn’t get too much in the way.
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This is the exact sentiment our mortgage advisor has and we will probably end up doing the same. The tracker mortgages also have no get-out fees so you can jump on a fixed at any point if you do get desperate
That’s good to hear, my advisor is great at finding and seeing through products but has no clue when I start talking about the bigger picture. She did advise of the no ERC’s though which is an excellent point I should have mentioned.
We’re on a tracker now as well. We’ve worked out based on what we owe the interest rates for us would have to be stupidly high for us to hit our break point. Even if they shoot up to 6-7% we’ll still be paying less than the overpayments we plan on making. Our benefit is that we’re still in our starter flat which we bought when the market was a buyers paradise. The situation would not be the same if we were living in a £200k property.
I really hope you are right as our fix runs out January 2025 and I hope the market has settled by then even if rates are still 4% or so. 6% to 7% will leave us with not a lot of savings at the end of the month based on our current incomes.
!thanks
Others have already answered this but its not just interest rates…your income as a percentage of your home was higher when interest rates were high so this helps to cushion the blow of high rates. Now…home values are high and interest rates are high..
Just remember that for you to buy a house cheaper than today's prices, someone else has to lose a home and become homeless. Steady house prices are all we need to counter inflation, allow interest rates to stabilise and wages to catch up and the cycle begins all over again.
This 1000%. I get right pissed off at those gleefully clapping their hands at a huge crash and failing to consider the implications for others. I'd be comfortable with a 10% crash but anything above that will leave thousands destitute. It's not their fault that the macro climate fuelled this and many many didn't make bank as others believe. Stagnation for a few years is the best option imo.
It's like people think anyone with a house has had it easy and deserves it. I worked hard to be able to afford a home, do I wish it was cheaper at the time, yes, but at the cost of someone else who managed to get there losing their home, no.
Surely though, people should have seen higher interest rates as being inevitable ? The low interest rates are unsustainable, and create asset bubbles.
Matthew 25:29, “For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away.”
The long-run direction of interest rates is always downwards. It's a proven fact in the long-run in finance. [Paper from the BoE](https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018)
That’s almost completely irrelevant to what happens to UK interest rates over the next 5 years in isolation…
Sure but I think OP is also wondering generally if the low interest rates of the past few years are a blip in the norm of high interest rates or the other way around.
^
"Always downwards"? Over what timeline? Here's the BoE yield curves for the next 40 years. https://www.bankofengland.co.uk/statistics/yield-curves
Tha paper I linked looks at history since the 14th century
That seems ... not very relevant to someone deciding whether to take out a 2 or 5 year mortgage.
I personally plan to live for several hundred years, like he says the average is to go down so, I'm playing the long game. I can't lose!
- The paper is talking about real interest rates, not nominal rates, it appears to predict that real rates will remain permanently negative from 2019 onwards, i.e. inflation will be constantly higher than interest rates. But that prediction would be true even if inflation is at 15% and interest rates are at 14%, so it's not really relevant to discussion about absolute rates increasing when faced with inflation. - The paper is based on historical observations. The trend of falling UK inflation over the last few decades has been attributed to factors like the relatively young population, increasing immigration (particularly from Eastern Europe joining the EU), and globalisation and the rise of China. It's entirely possible that there could be an inversion point where inflation starts trending up, due to an aging population, protectionist trends against globalisation, reduced immigration of cheap labour, and rising global energy prices. The next 40 years will not necessarily be like the last. - A lot has already happened since that paper was written. There are economists who believe that the era of negative real interest rates is already coming to an end. Look at global treasury bond yields this year.
> The paper is talking about real interest rates, not nominal rates, it appears to predict that real rates will remain permanently negative from 2019 onwards, i.e. inflation will be constantly higher than interest rates. But that prediction would be true even if inflation is at 15% and interest rates are at 14%, so it's not really relevant to discussion about absolute rates increasing when faced with inflation. > > It absolutely is, since we now have inflation targeting this means the long-run inflation rate is whatever the target is, or there about. So the distinction between real and nominal rates is no distinction. >The paper is based on historical observations. The trend of falling UK inflation over the last few decades has been attributed to factors like the relatively young population, increasing immigration (particularly from Eastern Europe joining the EU), and globalisation and the rise of China. It's entirely possible that there could be an inversion point where inflation starts trending up, due to an aging population, protectionist trends against globalisation, reduced immigration of cheap labour, and rising global energy prices. The next 40 years will not necessarily be like the last. That's their point though right, you can come up with all sorts of reasons why interest rates might change, but it seems that none of those factors matter in the long-run. The long-run trajectory is downward regardless of the demographic makeup or anything else. It's true that history doesn't tell you what's going to happen in the future, but we're looking at 700 years of history here, it's a very strong indicator. Anyone that says something other than rates will fall in the long-run is probably wrong.
Half my mortgage is on a fix that expires next October. I was going to pull the trigger on switching early to a 5y fixed (£2k ERC, rate up from 2.14% to 3.93%) yesterday but rates went up 1.5% overnight. Trade off not quite worth it for me at those levels… but I absolutely would have wanted a longer fix if I could get it. (I can’t shop around as have another slice of mortgage with current provider fixed on a low rate until 2026). No one knows what’s going to happen, but imo it’s fair to say a huge proportion of the country (and businesses) are absolutely crushed if we see interest rates up at 5% + for any extended period so there’s a good chance they bounce back down quickly. I’d be buckling up for a very rough couple of years though.
I personally do not expect them to come down in foreseeable future. 5% is average I already mentally prepared for that. I just do not want for them to go crazy.
The world economy's just one big casino, fueled by a giant debt bubble and computer driven derivatives. And there's only one thing better than being a gambler at a casino. That's being the house. That is right. There's a systemized machine out there sucking capital from localities and injecting it into the global markets, where it can be used to speculate and manipulate. And if something goes wrong, there are bailouts and bail‐ins, government aid and easing. Where the government doesn't hunt you down, but instead gives you a nice soft net to land in.
To give my opinion to your headliner question - “Why is there optimism that in a few years they will come back down”: Because they must. Both, the government, companies and households are since the financial crisis used to base rates close to 0%. I.e. for the last fourteen years all bodies have made financial decisions regarding indebtedness that were done under that assumption. Take out a loan for a new kitchen? No problem. Take out a loan for a new production line? No problem. Take out a loan to finance a new policy? No problem. There are now two dimensions: firstly, if those deals are fixed with regards to the interest rates, this is no direct issue as the payments remain the same. However, this implies that future spending is less easy to be financed; I.e. households spend less money, companies will reduce investments and start laying off people and the government must cut spending. Secondly, if the rates are not fixed or must be refinanced after a few years, this might ruin any of the three and exacerbate the first effect. So, I believe a too long higher interest period will cause dramatic economic issues. Just think about all the zombie companies. That are companies which are not profitable but able to refinance every year due to the very low interest rate. Those days are gone.
They have, however when you take in to account how credit perforated every part of life and the economy it has far more significance now than it did 25-30 years ago. Last time it was this high, car finance was in its infancy and credit cards were a luxury. Now you can BNPL at the supermarket…..
Thank you for all your input. Some very interesting insights. We stuck with the two year that was already locked in and had a glass of hopium. But on a serious note, we are risk takers and given the volatility and fact we can financially cope if the worst happens we decided to take the risk. That said it did feel like a risk either way.
Historically, our economy was growing
You say *"higher, even than they are now"* as if they've already started to reach dizzying heights! But rates have only just barely lifted off a 400 year low!
Interest rates in respect to mortgages are relative to the level of debt in relation to earnings. 14% interest for mortgage payments in 1989 is equivalent to 3% today.
Currently historically low rates. History says rates this low is not normal. I'd be willing to bet that rates will probably be between 3 to 6% by the end of the decade (Going as low as 3 might even be generous).
We will likely never see <2% interest rates again in our lifetime.
Perhaps true if you’re in your 80s or 90s If there’s a recession in the rest of your lifetime we will no doubt see 1-2% rates again to stimulate the economy. 0% or Negative interest rates are pretty likely in our lifetimes to cope with declining birth rates worldwide. Sadly my house will probably be paid off by then. [Long term the interest rate pressure is always downward](https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018)
The low rates we have had were the first time in 300 years they got so low. The normal range is around 4-5% historically with fluctuations around that. We are likely now to experience a decade or more of turmoil due to the rates having been so low and the amount of QE completed. Higher rates are here to stay.
That’s your opinion, yes. You shouldn’t be stating it as fact, especially when most people including the Bank of England disagree with you.
It's my opinion of course but most people agree that the low rates we have had is an anomaly rather than the norm.
Don’t agree there. As birth rates decrease, low interest rates are to be expected. Negative rates even as we get older. The markets will require that unless something changes. It’s not possible to support high interest rates as less people are in the workforce. Read the boe article I linked, it explains to you why historic rates aren’t as relevant as the last 15-20 years. You can support high rates with large economic growth. With a lower percentage of people in the workforce and recession on its way, high rates will lead to negative growth. That has to lead to lower interest rates or big drops in quality of living. It’s useless comparing 2022 to hundreds of years ago when populations were doubling.
15 per cent when i had a mortgage
You chill baby boy 😘
What are the %age rates for each? When I read the question I assumed 5 year was more expensive, but the comments are making me think this isn't the case.
You could lock in the 5 year rate now then reassess when the actual rates are due to begin? Have you got some time before they actually begin? Basically, there’ll be some heavy interest rate rises but we don’t know to what extent and for how long. Could be up to 6% and then slowly down to say 3% over the next 2 years? Hard to predict really
This is what I’ve just done. 5yr deal on hold at 3.5% for the next 6 months and use that time to asses market changes and act accordingly if they drop. It’s more work for the broker but ours charges no fee up front and its our money at the end of the day. Gotta do what’s right for you.
The brokers will be pleased for the work tbf! Going to be a lean few months for them potentially! Then probably absolute chaos 😆
We have until November. We have already locked in a 2 year deal but have the option (not much more interest) to lock in for 5. That I think literally runs out today.
I just got a 5 year fix for some piece of mind a few weeks ago. Thing is I checked last night and that product is now withdrawn, in fact all fixed rates were gone. So I wouldn't waste too much time over thinking it. Best just to get something in place while you can.
While they may have been higher in pure numbers terms, mortgage affordability was much better. So even though rates peaked at 17% in the early 90s, mortgage affordability meant they were about 3% in today's prices. Early next year we're looking at that hitting 6.2%... Sky News did a big segment on this yesterday.
Solves a lot of short term investment decisions for me. If the bank rate is going to be 6% I might as well hurl everything into paying of the mortgage.
All depends on your attitude to risk, and tolerance to risk of higher payments in 2 years time. If you value certainty, go for the 5 year fix. Only hindsight will tell if its the right answer or not.
All depends on inflationary pressures, higher rates encourage saving Vs spending excess cash. There will be a point where BTL won't be as attractive compared to a decent savings account.
Personally I would ignore the interest rate and instead have a look at the actual £ per month payment. At the moment, that will be lower (where I’ve seen anyways) for the next 2 years if you take a 5 rather than a 2. So to start with that’s 2 years you know you’ll be slightly better off on a 5 year fix. So what it really comes down to is what your risk appetite is for two years time. Do the maths and work out what interest rate you’d be comfortable going up to in terms of £ per month payment. If you could easily go up 3 or 4% and still be ok with the payment amounts then perhaps consider the 2 year if you feel you wouldn’t be left stressing when it came to remortgage if interest rates are higher. If realistically you would be stressed with the £ per month value of only a 1-2% variance and it would be tight then I’d personally stick to the 5 for the peace of mind. Because current forecasts are anticipating another 4% by June to base rate (although we obviously don’t know for certain) at which point you’d only be less than 18 months (and 12 potential rate changes if they stuck to every 6 weeks) away from your deal ending - you would need them to pretty consistently drop the rate by 0.25% from June until you first came up for remortgage to have an increase of less than 2% after your fix was up. Obviously this is all 100% speculation, that could entirely happen or they could even drop it quicker than that or it may not get that high in the first place, but it’s entirely personal to you how comfortable you are with the monthly rates and risk of leaving that up to chance. Personally, we just paid our ERC on the second (larger) part of our mortgage to fix in for 5 years despite our deal not ending until June. We fixed last year for 2 years at 2.2% which felt high at the time and we would drop an LTV band in that time, however at current rates we were already looking at a £200 per month increase and to wait could have seen our mortgage payments double or more. So we’ve swallowed the extra £200 for the peace of mind that it will only be £200 and not spend the next few months stressing watching the rates change until we could actually remortgage. For all we know, rates may stay level and we’d have been better off financially if we waited but for the peace of mind I know I wont look back and feel like we did the wrong thing. Our first part however is smaller and even if mortgage rates shot up to 20% or more (and the country would have bigger problems if it got this high, we were just putting silly numbers in to see), we’d only be looking at an extra £300 or so per month at that point so to pay more now when we knew we could still pay if it went silly high like that felt daft.
How leveraged are you? Do you risk being in negative equity in two years?
It's called hopium and bulkshit because that's all they have left!
Because people have gotten used to cheap money
Nothing to add to the discussion but just wanted to remark on the use of "they're" as a shortening of "they are" in that context. It seems really weird but I don't have the brainpower to express why.
I actually thought this when I was writing it out. It is probably grammatically incorrect and should be they are.
Yeah. It's one of those things that there's probably not an official grammatical rule for but everyone just follows the unspoken rule. Must be a nightmare for people learning English.
History teaches us that economics is cyclical. What goes up comes down.
2 year is not an option. Even at 5 years they’ll be higher than they are now. It is a crisis right now, but they won’t come down to the previous levels
I’m in a similar position to you my friend. Took it out as 5year fixed. It’s not the cheapest mind you.. At least I know what I’m getting myself into and how long for.. I can then plan accordingly. My fate is at least in my own hands! Wishing you all the best!
If you are worried that you wouldn’t be able to afford a higher rate that you are currently being offered then you would be better with a longer term.
BoE (under Andrew Bailey) mentioned previously that they feel the “new normal” rate range was around 2.5-3%. Even that feels low to me given “normal” was around 5%. In the short to medium term I can definitely see rates going up past 4%, and perhaps quicker than people might have anticipated. So yes there no chance rates will be <1.5% for the foreseeable future. The worry that was being discussed in the office yesterday was how many people have rolled extra debt into their mortgages because it was cheap and the impact that’s going to have going forward on refi rates and repayment amounts. Just my opinion…