Banks Already Factoring In Doubling Of Mortgage Rates

[Realistbear]

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.

This underscores the reality of the OP link. Its already happening.

The market is sayng you partied during the Brown years now its time to pay for the party.

[The Masked Tulip]

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.

On the other hand, these are ruthless, greedy selfish sods who appear to have little empathy with anything other than how much cash they make and what 'things' they can buy with it.

Would bw ankers even pause for thought if thousands of people were losing their homes? I doubt it.

To be frank, I am caught two ways here - part of me thinks about the economic turmoil... think I might be suffering from Stockholm Syndrome... and part of me wants it to happen and happen this week in order for UK house prices to crash and crash as they should have.

Is any indication given as to when this doubling of mortgage IRs might happen?

[Realistbear]

A spokesman for the Council of Mortgage Lenders, said: “Lenders assess affordability in different ways. Some are taking the view that it is prudent and sensible to assess how affordability would be affected by a change of circumstances.”

From the OP link.

[Once in a lifetime]

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.

?

No doubt. can you explain why we've had 0.5% base rate for one year ! if 9% wouldn't be a problem ??

[xux42]

And i might win the lottery tonight!

Technically!

I didn't say it was likely!!

Interested phenomena seems to be emerging here - HPC'ers have suffered the irrationality of govts. and markets for so long that they are becoming as skeptical that unpleasant policies and business practices will be implemented as the general public.

People on here ought to know better - sometimes the markets can stay irrational for an annoyingly long time, even decades, but correction is inevitable.

[The Masked Tulip]

Technically!

I didn't say it was likely!!

Interested phenomena seems to be emerging here - HPC'ers have suffered the irrationality of govts. and markets for so long that they are becoming as skeptical that unpleasant policies and business practices will be implemented as the general public.

People on here ought to know better - sometimes the markets can stay irrational for an annoyingly long time, even decades, but correction is inevitable.

Yes, it is a variation on Stockholm Syndrome. I think the next step is being sat at a table opposite an estate agent, a gun with one bullet in the barrel on the table and house sellers standing all around betting on who will 'win'.

[Winston Wolf]

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...

That cannot be argued against but that doesnt mean it WONT happen!

Edited February 27, 2010 by Winston Wolf

[Dr fellgood]

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.

You are obviously very young or have a short memory- i remember in my life time mortgage interest rates of 17% - and you say rates of 9% could never happen! what happens when we need to control inflation after all that 'printy printy' (and possibly more to come). Take a look at historical bank of England rates an explain why a rate rise could not possibly happen? http://www.bankofengland.co.uk/monetarypolicy/decisions/decisions10.htm

[LuckyOne]

On the other hand, these are ruthless, greedy selfish sods who appear to have little empathy with anything other than how much cash they make and what 'things' they can buy with it.

Would bw ankers even pause for thought if thousands of people were losing their homes? I doubt it.

To be frank, I am caught two ways here - part of me thinks about the economic turmoil... think I might be suffering from Stockholm Syndrome... and part of me wants it to happen and happen this week in order for UK house prices to crash and crash as they should have.

Is any indication given as to when this doubling of mortgage IRs might happen?

To paraphrase things differently to others, banks actually don't determine the absolute level of interest rates that they charge across the yield curve.

Banks are simply intermediaries and charge a variable margin above the level at which others are willing to lend to them.

I do agree that margins have widened out while banks try to rebuild their capital but a sharp rise in rates is going to come because the marginal lender is asking for a better return and not because banks are acting in isolation.

It is easy to be angry with banks. The reality is that we can only be angry with them about like for like margins across the yield curve and not the absolute level of rates.

If rates really rise sharply, it is going to be because the utlimate lenders want better returns. The ultimate lenders are savers who are individuals, pension funds, sovereign wealth funds, some central banks etc.

[The Masked Tulip]

That cannot be argued against but that doesnt mean it WONT happen!

I want it to happen and I want now this weekend, this minute, this moment - let the mortage rate double and let all those feckless greedy sods go under.

I wish for many things though - good health, world peace, winning the lotto, having an endless queue of gorgeous women wanting to soothe my troubled brow - but wishes and realities are sometimes separate things.

[The Masked Tulip]

If rates really rise sharply, it is going to be because the utlimate lenders want better returns. The ultimate lenders are savers who are individuals, pension funds, sovereign wealth funds, some central banks etc.

I was thinking about this the other day - as a saver I am powerless to get the banks to give a higher IR. Yes, I can withdraw my savings and put it all under the mattress but millions of people are not going to do that - thieves would have a field day.

I can move it overseas but, again, millions of UK savers are not going to do that.

Ergo, we are powerless.

[aa3]

That's a bold prediction.

p-o-p

Indoubedly.

My opinion is the industrialiazed nations will have to print all day long, and keep rates at zero to fight off deflation. And even so they might still fall to it.

Last year the BoE took interest rates to 0.5%.. the previous low in the 300 year history of the BoE was 1.75%. And last year the BoE expanded the base money supply by 169%. All that and they got a slight positive reading for inflation for January with an easy yoy comparison to the depth of the financial crisis in the early months of 2009.

[pete.hpc]

?

No doubt. can you explain why we've had 0.5% base rate for one year ! if 9% wouldn't be a problem ??

Because 0.5% base rate hasn't meant 0.5% mortgages?

[Greg Bowman]

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....

and if you have financed legitimate working capital to fund business and possibly your salary?

Try and think outside hpc please. And do you think the ISPs are going to send their new found wealth?

[Winston Wolf]

I want it to happen and I want now this weekend, this minute, this moment - let the mortage rate double and let all those feckless greedy sods go under.

I wish for many things though - good health, world peace, winning the lotto, having an endless queue of gorgeous women wanting to soothe my troubled brow - but wishes and realities are sometimes separate things.

If youre young couple with a small deposit you can either live with youre parents OR buy a moderate house you can barely afford. Do you want those people to lose thier deposits via a repossession, they have been given little choice and it's a little unfair to call them either feckless or greedy.

What needs to happen is that real greed is targeted!

[LuckyOne]

I was thinking about this the other day - as a saver I am powerless to get the banks to give a higher IR. Yes, I can withdraw my savings and put it all under the mattress but millions of people are not going to do that - thieves would have a field day.

I can move it overseas but, again, millions of UK savers are not going to do that.

Ergo, we are powerless.

Individual savers are completely powerless I agree. The collective actions of individual savers are very powerful indeed though.

Rest assured that banks spend a lot of time and money trying to predict the behaviour of savers collectively. Regulators in sensible countries do the same thing to determine the "stickiness" of retail deposits when coming up with liquidity ratios etc.

My savings and your savings in isolation are irrelevant to banks. The collective savings of all individuals are more important to banks than any other source of funding both in terms of amount and cost.

If savers in this country could somehow "unionise" and act collectively, they would enjoy much better returns as the power relationship between lenders (savers) and borrowers (banks) would become much less unequal.

[headrow]

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...

Why would it though?

Half the houses in the country have no mortgage on them , some will have very little outstanding.

The only people it would bring down are those who bought in the past 5 years or those who released all the equity in their house and spunked it away, We haved done enough for these people already by keeping rates low last year and all of this , they got a get out of jail free card , lets hope they used it and paid down their debt.

As for the savers , they must be very thick if they havn't managed to find somewhere the past year where they can get over 5%.

[puppee]

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.

if you read the article properly they are not saying interest rates are going to rise to 9% , what they are doing is factoring in these rates to limit how much people can borrow against their incomes so if we can't borrow as much then house prices only have one way to go and it is not up, that is my interpretation of the article.

[Darxide]

I think we really are sailing into uncharted waters here.

A few years ago, nobody would have predicted that rates would be 0.5%, and stay there for so long.

Nobody could have forseen that the BOE would print so much money out of thin air. (How many people had even heard of QE before the crash?)

Fact is, nobody knows whats going to happen next regarding IR's. Because it's still to early to tell what effect the low IR and QE has really had.

Rates may well stay low for years, or they could just as easy hit 8%, or even more.

Can anyone really say that either of those options is 'not possible'?

If so, I wish I had your powers.

[The Masked Tulip]

I think we really are sailing into uncharted waters here.

A few years ago, nobody would have predicted that rates would be 0.5%, and stay there for so long.

Nobody could have forseen that the BOE would print so much money out of thin air. (How many people had even heard of QE before the crash?)

Fact is, nobody knows whats going to happen next regarding IR's. Because it's still to early to tell what effect the low IR and QE has really had.

Rates may well stay low for years, or they could just as easy hit 8%, or even more.

Can anyone really say that either of those options is 'not possible'?

If so, I wish I had your powers.

Yep, you are right. There is so much unknown at the moment. Pretty frightening time for people trying to save for their futures or simply to hold on to their savings.

The Editorial in Moneyweek this week suggests that whilst you may be losing out to inflation having your money in cash that it is actually safer than virtually any other investment option at the current time.

[xux42]

whilst you may be losing out to inflation having your money in cash that it is actually safer than virtually any other investment option at the current time.

Isn't that a way for the wealthy to put upstarts who have got a modest amount together in their 'place'?

If that's what's going on we need to start building guillotines...

[mdman]

I don't quite agree with you 1970s analysis...

Whatever the merits of the 1970s analysis, I believe Pedro for the Fed is spot on when he writes:

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.

I think it's extremely unlikely that things will play out the same way here as they did in Japan for this reason.

[tim123]

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

Rubbish

Mortgage rates just happened to be at 5-6% when something else crashed the system.

5-6% is a perfectly workable interest rate IMHO.

tim

[Jack's Creation]

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

Actually, I think what we are currently experiencing is a concurrent Global credit contraction and inventory led recession(one is the corollary of the other). It won't actually end till all the spare capacity that was built up during the largest credit bubble ever is removed from the system. Given that most of the world's spare manufacturing capacity is based in China and India, one of three things need to happen before growth (*and credit expansion can begin again). China's internal market need's to be massively and rapidly expanded to soak up it's spare capacity, China needs to revalue it's currency (it's at least 60% undervalued)or China collapses into political turmoil( due to wealth inequalities or democratic pressure)

It doesn't matter how much money a CB prints in an attempt to fake wealth, the risk reward ratio's attached to leverage remain constant and adjust to the amount of money in circulation.

[dances with sheeple]

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.

Consumption is f*cked anyway, you need MEW and lots of plastic for that? Doubling rates would mean house prices would fall, demand would increase, and people would be paying double the old mortgage rate on a house that has lost 50% of it`s previous value? So you are paying 8% on a 100k loan instead of 4% on a 200k loan, or am I being simplistic? Either that or the banks can`t make any new mortgage loans on the scale they need to?