Banks Already Factoring In Doubling Of Mortgage Rates

[Realistbear]

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/7324295/Home-owners-being-restricted-with-loans-based-on-future-interest-rates.html

Home owners being restricted with loans based on future interest rates

The amount of money banks and building societies are willing to lend to home owners is being based on future interest rate rises for the first time, it can be disclosed..../

Despite an average two year fixed rate mortgage being 4.75 per cent, some high street lenders are basing their affordability calculations on almost double this amount.

Some lenders suggested that when deals run out, borrowers could end up paying a SVR of 8 per cent or higher.

The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one year’s salary instead of a more traditional three times multiple.

Anticipating a doubling of mortgage costs sounds sensible if you also take into account the degree to which affordability will be impacted by unemployment which will continue rising as the double dip worsens. House prices will take a huge hit this year and Rightmove may well make more money as a flood of properties get listed on their website.

[interestrateripoff]

The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?

You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.

This isn't going to happen.

[cashinmattress]

The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?

You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.

This isn't going to happen.

Oh really? You having a 'I'll eat my hat if.." Krusty moment?

You assume that the banking cartel has a heart and compassion for their clients.

People can afford to pay more out on loans, and they will.

Government can change the goalposts at will.

I don't agree with you on that one.

[Realistbear]

The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?

You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.

This isn't going to happen.

The entire financial system already collapsed. We are in an Alice in wonderland position waiting for the other shoe to drop. Sterling is the barometer of how the market sees reality and the dire state of our economy. Debt places us next to Iceland and the way out is a downgrade in our credit rating with higher IR to reflect risk.

[singlemalt]

Thought it was a very apt photo in that article.

[interestrateripoff]

Oh really? You having a 'I'll eat my hat if.." Krusty moment?

You assume that the banking cartel has a heart and compassion for their clients.

People can afford to pay more out on loans, and they will.

Government can change the goalposts at will.

I don't agree with you on that one.

No the maths says it won't happen, compassion has nothing to do with it. Rates that high would kill the economy. Mortgage rates at 6% crashed the system meaning the base rate having to collapse to 0.5%, just what do you think would happen if mortgage rates hit 9%?

So if wages are cut you think people will be able to afford the loan repayments? I don't share your confidence.

People might be able to afford higher rates for a short period but at the cost of wider consumption in the economy. This would trigger a chain reaction across the rest of the economy as demand would collapse.

[Mikhail Liebenstein]

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/7324295/Home-owners-being-restricted-with-loans-based-on-future-interest-rates.html

Home owners being restricted with loans based on future interest rates

The amount of money banks and building societies are willing to lend to home owners is being based on future interest rate rises for the first time, it can be disclosed..../

Despite an average two year fixed rate mortgage being 4.75 per cent, some high street lenders are basing their affordability calculations on almost double this amount.

Some lenders suggested that when deals run out, borrowers could end up paying a SVR of 8 per cent or higher.

The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one years salary instead of a more traditional three times multiple.

Anticipating a doubling of mortgage costs sounds sensible if you also take into account the degree to which affordability will be impacted by unemployment which will continue rising as the double dip worsens. House prices will take a huge hit this year and Rightmove may well make more money as a flood of properties get listed on their website.

RB, I have to say I disagree with you on this. My suspicion is that we are more in for a long hard Japanese style slog than a sudden IR hike and associated collapse, though we'll differ from Japan in not seeing such obvious deflation. The reality is the Government doesn't give a monkeys about Sterling and so I suspect we will see Sterling fall again in the near term and thereby more inflation, but at the same time they'll just kick of QE again. They'll keep doing this in the hope of driving the economy forward, and all it will do is generate 3%-5% inflation over a sustained period, so within 7 years the debt problem will be significantly reduced.

The trouble with the high IR scenario is that no Government will ever sanction it, the damage to the real economy would be immense and would never recover in time for the next election.

This is essentially a repeat of the 1970s. We are already seeing wage hikes in some industries, bankers and evensome univeristy lecturers have had big rises. I'm in IT Sales, and whilst i had to change job to do it, I've put my base salary up by over 50% since 2007. If you can prove you add value people will pay for it, but I suspect it is the less skilled jobs that face the brunt of globalisation.

What seems to happen is that during a recession firms shed their less productive workers, but often have to pay more to keep the good ones. When recovery comes average wages in the firm have risen and so when people get re-hired the expectation of what a decent salary is often higher and so off kicks the next boom.

Edited February 27, 2010 by mikelivingstone

[Guest_chris c-t_*]

If IRs hit 9%, one might be able to buy a house with, say 50 oz of gold?

[non frog]

The interest rate will be what it will be. Its not set by the lenders and if the bank rate is 12% they will not have a SVR mortgage at 5%.

Anyone borrowing money for any reason on any loan that has a variable interest rate would be very well advised to stress-test their repayments to a rate of one or two percent above the long term average figure for the period of the loan.

Relying on the BS in the chip-wrapper media or the word of some politician is an unwise policy.

Interest rates of 10% or more seem a real possibility to me in the near future. I am looking at buying a business and my affordability criteria calculations are based on 11.5% The loan would be over 10 years. I have stress tested the model to 22%

[VeryMeanReversion]

>The extra restrictions mean a family with a household annual income of £60,000 may only be able afford to borrow the equivalent of one year’s salary instead of a more traditional three times multiple.

I thought this article is a big deal. The top few earners will be able to buy a third of an average house (at current prices).

Bit of a dodgy maths involved in the article but even then, it only makes sense for lenders to offer mortgages that can be afforded over the full term of the mortgage period. If only they had thought of that earlier.

Looks to me like another step towards the death of the mortgage market. There are no funds available anyway since MBS died.

No real wage increases and dramatically reduced mortages should be good for at least 50% halving in house prices. If only goverment left the market to sort itself out, otherwise nothing will happen to prices if they keep print support.

VMR.

[Mikhail Liebenstein]

the market decides IR's,CB's decide base rates.never say never.

some mortgage rates are already way hgiher courtesy of lower LTV requiremnets,ie forcing more capital up front.you never see them mention that on the BBC do you?but it is effectively a massive hike in debt servicing costs,jsut anpother way of doing it under the radar.

no BTL's now over 75% LTV.

obviously,higher IR's is bullish for stocks!!!!!buy buy buy!!!!!!!!!!

If you actually think there is a market, you have been sadly mislead.

I have now realised that in essence we have a banking cartel and the cartel manages the system. It got out of control in 2002-2007 and was just shifting volume, but as the cartel doesn't want to go bust again it will try to maintain solvency of the borrowers.

One of the weird features of this downturn has been a lack of repossessions, which we now has been the result of policy, and this has had the effect of protecting the banks from further losses. If the market had been left alone we'd now have no banks, but the Government would be quickly constructing some new ones.

Edited February 27, 2010 by mikelivingstone

[aa3]

Imo these banks are basically idiots. I doubt we'll see >1% BoE base rates ever again. And Brits seem to be agreeing with me, I was reading that between 80-90% of new mortgages taken out right now are on trackers.

[Bloo Loo]

The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?

You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.

This isn't going to happen.

doubling of rates wont collapse the economy.

for example, pensioners, currently delighted with 2% returns on their cash, will see their incomes double or treble.

only borrowers will lose, and they are currently enjoying those low rates.

If they arent paying down now....thats there look out....

[Once in a lifetime]

Got to agree with interestrateripoff, total meltdown if rates hit 9%.

why do you think we're at 0.5% for one year ?

[piece of paper]

Imo these banks are basically idiots. I doubt we'll see >1% BoE base rates ever again. And Brits seem to be agreeing with me, I was reading that between 80-90% of new mortgages taken out right now are on trackers.

That's a bold prediction.

p-o-p

[nixy]

If you actually think their is a market, you have been sadly mislead.

I have now realised that in essence we have a banking cartel and the cartel manages the system. It got out of control in 2002-2007 and was just shifting volume, but as the cartel doesn't want to go bust again it will try to maintain solvency of the borrowers.

One of the weird features of this downturn has been a lack of repossessions, which we now has been the result of policy, and this has had the effect of protecting the banks from further losses. If the market had been left alone we'd now have no banks, but the Government would be quickly constructing some new ones.

but as the cartel doesn't want to go bust again it will try to maintain solvency of the borrowers.

Amazing when you put it like that isn't it.

You can imagine a parasite clinging to the back of it's staggering host borrower, drawing as much as it can from them without actually killing them.

Nice

[ccc]

There might be big banks. These might be under ownership by the taxpayer. These big banks may have lots of big projects on the go. These big projects may be planned over the next few years. These Banks might have factored in inflation at around 6% for their calculations. This may mean something - in that this is what they are expecting for the next few years. Then again it may mean nothing - and is just a complete guess. If this is happening. Which of course it might be. Then again it might not.

Who knows.

[Mikhail Liebenstein]

one difference between us and japan is that they had willing buyers for their govt debt internally ie mr/mrs watanabe.the big buyers of Gilts are not UK based.

as for the 1970's that was an inventory recession,this is a credit recession.to me,big difference in terms of inflation risk

I don't quite agree with you 1970s analysis, in some ways the economy was in a similar position, but a lot of the effects were masked by inflation when we look back. There were indeed restrictions on getting mortgages back then as well and things did tighted up as they have now - indeed in one of those retrospective questions kids ask I do recall asking my parent in the 1980s when they told me how low their mortage was (£100 per month) and how mcuh the house was worth (something like a £140k) why they didn't buy a bigger house in the 1970s as the value would surely have gone up by more. The answer being that the banks lending was much tigher and people earnt less in the 1970s.

What I draw from that is that during the downturn their is opportunity to buy things cheaply (contrasted to what they will cost in 10 years from now), but that you only have that opportunity if you have the money or at least a very hefty deposit. Again this is the market allowing the rich to get richer at the expense of everyone else.

[xux42]

Oh really? You having a 'I'll eat my hat if.." Krusty moment?

You assume that the banking cartel has a heart and compassion for their clients.

People can afford to pay more out on loans, and they will.

Government can change the goalposts at will.

I don't agree with you on that one.

Agree.

What has people suffering got to do with anything? The govt. cares about votes but the financiers don't and go tell the govt. to p1ss up a rope if it suits them to ramp rates and put families out on the street.

Personally I don't give a fig about the over-leveraged. I do feel sorry for people with commensurate mortgages who have had their incomes downsized though.

9% rates won't destroy the economy - markets will always re-form and anyway there are fare more people with small or no mortgages than those with big mortgages

Its easy to get all 'Armageddon' and confuse millions losing their jobs, homes and even lives with the collapse of civilisation, but they are not the same things.

In fact lots of people dying often leads to a huge renaissance.

[Mikhail Liebenstein]

Amazing when you put it like that isn't it.

You can imagine a parasite clinging to the back of it's staggering host borrower, drawing as much as it can from them without actually killing them.

Nice

Absolutely 100% spot on.

The banks are literally parasites on the economy. The have a government license, and their job used to be to lend money to people who had good ideas and who could build a business or create real wealth. Sadly this has been perverted and we had and probably still have banks that purely aim to shift as many units of product (money) as possible, the result is that as more easy money flows in assets get inflate so every single person and business has to borrow more to pay more for those assets they need in the everyday course of life and business. The banks are quite literally parasites, drawing interest payments from anyone or thing that want to participate in the economy.

You can't avoid the parasites, as if you want to do absolutely anything you need capital, assets etc and these have been inflated and so you are forced to borrow. The only way out is to literally drop out, though I wouldn't recommend that, though perhaps another alternative is to become a bad debt, ie borrow too much and then poison the pest by not repaying.

Edited February 27, 2010 by mikelivingstone

[xux42]

Got to agree with interestrateripoff, total meltdown if rates hit 9%.

why do you think we're at 0.5% for one year ?

Base rates are not the same as Mortgage rates.

In fact economically, Mortgage rates could increase by less than any base rate rise.

Alternatively, Mortgage rates can go to 9% with a base rate of 0.

The lack of appreciation of this on this site is worrying.

[Winston Wolf]

In fact economically, Mortgage rates could increase by less than any base rate rise.

And i might win the lottery tonight!

[Frank Hovis]

The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?

You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.

This isn't going to happen.

Yes it will. I'm doing business plans at 8.5% at the bank's insistence, and this is as a margin upon low inflation assumptions. If inflation kicks up it will go higher.

9% is not base rate or LIBOR. It is LIBOR + a lending margin + inflation as banks seek to start making some money again. At present 4.5% + 2% + 3% = 9.5%. That's what they want to get to and that's the kind of deal they want you to sign up to.

[Realistbear]

RB, I have to say I disagree with you on this. My suspicion is that we are more in for a long hard Japanese style slog than a sudden IR hike and associated collapse, though we'll differ from Japan in not seeing such obvious deflation. The reality is the Government doesn't give a monkeys about Sterling and so I suspect we will see Sterling fall again in the near term and thereby more inflation, but at the same time they'll just kick of QE again. They'll keep doing this in the hope of driving the economy forward, and all it will do is generate 3%-5% inflation over a sustained period, so within 7 years the debt problem will be significantly reduced.

The trouble with the high IR scenario is that no Government will ever sanction it, the damage to the real economy would be immense and would never recover in time for the next election.

This is essentially a repeat of the 1970s. We are already seeing wage hikes in some industries, bankers and evensome univeristy lecturers have had big rises. I'm in IT Sales, and whilst i had to change job to do it, I've put my base salary up by over 50% since 2007. If you can prove you add value people will pay for it, but I suspect it is the less skilled jobs that face the brunt of globalisation.

What seems to happen is that during a recession firms shed their less productive workers, but often have to pay more to keep the good ones. When recovery comes average wages in the firm have risen and so when people get re-hired the expectation of what a decent salary is often higher and so off kicks the next boom.

Its not me you are disagreeing with--the banks are already factoring in a doubling of rates therfore double they will be. Done and dusted. We may, on the other hand fall into Jap style deflation which will have the same effect in real terms. Pain either way.

Our econony has already collapsed. I was saying well over 2 years ago that our banking system wqas insolvent and that we were going into structural failure unlike any other collapse since the S Sea Bubble implosion and the intorduction of fractional reserve banking as an antidote to it ever happening again (hah!).

We have not yet begun to feel the pain that we must endure for Browns waste years and debt accumulation. Doubling of IR will be only part of the medicine.

[The Masked Tulip]

The doubling of mortgage rates will not happen, it would crash the entire financial system. Shouldn't the banks be more concerned about current borrowers? Can they afford interest rates at 9%?

You then have to consider the wider economic impact, rates at 9% would cause a collapse in aggregate demand leading to a massive collapse in GDP as consumer spending would stop.

This isn't going to happen.

I enjoy your posts RB and always make a note of looking for any threads you start but... I am with interestrateripoff here... it would bring about a collapse in so many ways...