Monday, Jun 11, 2007
Credit will be more expensive
Times: Markets fear fresh turmoil with sell-off in bonds set to continue
A 50 to 100 basis point increase on mortgage rates (floating, fixed and you name them...) is on the cards... tough times for borrowers ahead!
Posted by confused76 @ 09:05 AM (296 views) Add Comment
5 Comments
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1. Orwell said...
Confused,
I don't understand why this should be?
Explain please.
2. confused76 said...
both the "standard variable rates" and other rates (fixed, introductory etc) depend on prevalent credit market conditions. the bank lends you money for a POSITIVE spread on what they can buy money at, that sets their standard variable rate above the BoE base rate. A "tracker" instead is a mortgage locked to follow the base rate.
In the past we have had cheap credit for a UNIQUE combination of factors:
- Low BoE base rate
- Ultra low credit spreads for risky creditors
- Inverted yield curve (which means long term debt is cheaper than short term, i.e. in expectation that future T-bill rates decline)
All these things are changing now... going forward, more expensive credit will impact house buyers by:
- increasing standard variable rate spreads (for existing mortgages)
- increasing the rate on fixed-rate products (2, 5 year and longer) which will impact both new buyers and existing home owners (when remortgaging)
- increasing the introductory rates (e.g. discounte 0.5% below BoE)
3. Orwell said...
So to be very dim (I am a lawyer after all),
I want a £200k mortgage and I go to Gnat West for it. Don't they just get the money from the BOE for say 5.5% and add on effectively commission at 2% meaning I say pay 7.5% ?
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5. uncle tom said...
The bond markets have always been a b****r to predict...
All that can be said is that given the dire deficits of countries like the UK and US, and the consequent likelihood that the £ & $ will become devalued against commodities and other currencies, the yield on these instruments has remained surprisingly low.
Japan's counter deflation strategy is partly to blame, and that may now be about to unwind. I also wonder how long it will be before the new rich in China and Russia (not to mention the oil states) come round to the idea that there are better things to own than American IOU's