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House Price Drops Vs Interest Rate Rises

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Just a post to gather opinions on this.

Arguably the best mortgage deal around right now is the 5% fixed rate for 10 years. Your opinions may differ, but for this example I'll be using the 5% fixed for 10 years rate.

If we assume a house currently costs £133,333 - and a person takes out a 25% mortgage with a 33,333 deposit. Leaving a 100k mortgage. (Nice round numbers).

We can see below how much the mortgage cost would increase if they waited for the price crash before buying and taking out the mortgage.

£100,000 mortgage at 5% over 20 years.

Over the 10 year fixed rate period you pay £80,241.

£100,000 mortgage at 6% over 20 years. (1% increase on today's rates to 1.5% boe base rate)

Over the 10 year fixed rate period you pay £87,183.

Would need a house price drop of ~7k, or ~5%.

£100,000 mortgage at 7% over 20 years. (2% increase on today's rates to 2.5% boe base rate)

Over the 10 year fixed rate period you pay £94,392.

Would need a house price drop of ~14k, or ~10%.

£100,000 mortgage at 8% over 20 years. (3% increase on today's rates to 3.5% boe base rate)

Over the 10 year fixed rate period you pay £101,851.

Would need a house price drop of ~21k, or ~15%.

£100,000 mortgage at 9% over 20 years. (4% increase on today's rates to 4.5% boe base rate)

Over the 10 year fixed rate period you pay £109,545.

Would need a house price drop of almost 30k, or 20%

Very rough figures, but you get the idea.

If house prices drop by 15%, but the bank of england raises interest rates to 4.5% - you still end up paying about the same.

Therefore there must be a point at which the prices drop but the rates have not yet risen, and I think this will be the call to make if you want to get a good deal in the coming HPC.

Eager to read people's thoughts on this. I think rate rises will be almost as big of a factor as price drops themselves. You can see their point when people say "affordability is good right now' - it's not just the price but the cost of leverage which is an issue.

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i think thats a really good point. i've been keen to see some workings like that but just too stupid/lazy to work it out for myself.

i'm keeping my fingers crossed for crash so big that i can buy the house I want for cash.

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yes, which was the logic behind the chunk of HPCers bought houses on fixed rate deals, (or discounted tracker deals before the ir rate dropped)

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I did a very similar analysis when I bought 2 months ago, worked out that including the money I'd throw at rent whilst waiting for the drop, It would need to drop 30% before I would have been financially better off waiting. I took the 5% over 10 years fixed deal. Plus, what price does one put on owning/occupying their own property, rather than having the limitation and uncertainty that comes with renting a home.

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Interesting,

We often read / feel that interest rates are going rise and we also hear that house’s will come down again as it is happening now

So there are two outcomes, in real terms the cost of housing could go up. Or, it will add as a compounding effect causing even more falls as people can’t afford to buy even at lower prices simply because of the interest rate of the mortgage.

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As the house price drops, your deposit pays a larger amount, so your mortgage amount decreases.

In addition, you need to take account of future trends - i.e. long term interest rates - what happerns at the end of the fixed rate period. What happens to pay incomes in such a scenario, and what effeect does this have on the payback rate you can afford in each scenario?

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Opportunity cost.

If you are in a position to proceed and have access to the best mortgage deals/rates. I would assume you'd have a sizable cash deposit >25%?

Mine is fairly static at the moment and the return isn't great, but still it's paying the rent.

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Why would I take out a 100k mortgage in every situation? Surely if the price of the house crashes, I would hand over the same deposit amount (33k), and get a smaller mortgage.

Am I being thick?

Does anyone know how to put excel tables into responses?

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£100,000 mortgage at 5% over 20 years.

Over the 10 year fixed rate period you pay £80,241.

£100,000 mortgage at 6% over 20 years. (1% increase on today's rates to 1.5% boe base rate)

Over the 10 year fixed rate period you pay £87,183.

Would need a house price drop of ~7k, or ~5%.

£100,000 mortgage at 7% over 20 years. (2% increase on today's rates to 2.5% boe base rate)

Over the 10 year fixed rate period you pay £94,392.

Would need a house price drop of ~14k, or ~10%.

£100,000 mortgage at 8% over 20 years. (3% increase on today's rates to 3.5% boe base rate)

Over the 10 year fixed rate period you pay £101,851.

Would need a house price drop of ~21k, or ~15%.

£100,000 mortgage at 9% over 20 years. (4% increase on today's rates to 4.5% boe base rate)

Over the 10 year fixed rate period you pay £109,545.

Would need a house price drop of almost 30k, or 20%

How do you calculate these payments?

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As the house price drops, your deposit pays a larger amount, so your mortgage amount decreases.

In addition, you need to take account of future trends - i.e. long term interest rates - what happerns at the end of the fixed rate period. What happens to pay incomes in such a scenario, and what effeect does this have on the payback rate you can afford in each scenario?

Even with the deposit:mortgage ratio shifting:

From a very simple (and cheap) example:

100k house, 25k deposit, 75k mortgage. Over the 10 years @ 5% = £60,182.

80k house, 25k deposit, 55k mortgage. Over the 10 years @ 9% = £60,249.

A 20% decrease in price was offset by a 4% interest rise.

Another example.

200k house, 50k deposit, 150k mortgage. Over the 10 years @ 5% = £120,360.

160k house, 50k deposit, 110k mortgage. Over the 10 years @ 9% = £120,480.

1% interest rate rise appears to nullify 5% of price drops.

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Even with the deposit:mortgage ratio shifting:

From a very simple (and cheap) example:

100k house, 25k deposit, 75k mortgage. Over the 10 years @ 5% = £60,182.

80k house, 25k deposit, 55k mortgage. Over the 10 years @ 9% = £60,249.

A 20% decrease in price was offset by a 4% interest rise.

Another example.

200k house, 50k deposit, 150k mortgage. Over the 10 years @ 5% = £120,360.

160k house, 50k deposit, 110k mortgage. Over the 10 years @ 9% = £120,480.

1% interest rate rise appears to nullify 5% of price drops.

How much do you owe at the end of the 10 year period in each scenario, and how much is your (relative) income at that stage for both?

You might find your difference there, and why high house prices are bad.

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Another way to look at it is the amount of money that one can borrow for a fixed payment of £ 1,000 per month at different interest rates. I have based my calculations on a 25 year amortisation of the loan amount.

3% : £ 210,876.45

4% : £ 189,452.48

5% : £ 171,060.05

6% : £ 155,206.86

7% : £ 141,486.90

8% : £ 129,546.52

9% : £ 119,161.62

10%: £ 110,047.23

A buyer who can afford a payment of £ 1,000 per month can afford to buy a house at the loan amount for any given interest rate plus their deposit. With a positively sloped yield curve, borrowers are naturally tempted to fix for a short term only as it raises their borrowing capacity until rates rise.

In addition to the risk of rising interest rates, there is also a risk to falling incomes. Both will help push house prices lower.

To protect consumers from taking rash decisions, there should be minimum deposit on a house of 35% - mortgage rate - term of fixed interest rates in years to tighten lending criteria in very low interest rate environments and to loosen lending criteria in higher interest rate environments and to encourage people to fix for longer. A rule like this would also help reduce booms and busts due to its countercyclical and interest rate risk reducing nature.

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PMT (payment) function in Excel/VBA code.

http://www.techonthenet.com/excel/formulas/pmt.php

Calcs like the bbc's mortgage calc seem to give results very close to vba.

Cheers

Here are my calcs assuming a 25 year mortgage, current average house price, 41k deposit (25% of current avg price). Deposit remains the same as I assume person will not lower deposit in response to drops. Cannot get excel in, have stuck it in paint. Comments welcome

HPC.JPG

post-20811-1278594439606_thumb.jpg

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I did a very similar analysis when I bought 2 months ago, worked out that including the money I'd throw at rent whilst waiting for the drop, It would need to drop 30% before I would have been financially better off waiting. I took the 5% over 10 years fixed deal. Plus, what price does one put on paying rent to the bank instead and taking on a huge debt in the form of an illiquid asset rather than staying in cash and being quickly mobile in these uncertain times ?

fixed for you

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How much do you owe at the end of the 10 year period in each scenario, and how much is your (relative) income at that stage for both?

You might find your difference there, and why high house prices are bad.

Good call. Something to keep in mind.

With the example I gave you,

200k house, 50k deposit, 150k mortgage. Over the 10 years @ 5% = £120,360. <-- After the 10 years this person owes 75k more.

160k house, 50k deposit, 110k mortgage. Over the 10 years @ 9% = £120,480. <-- After the 10 years this person only owes 55k more. Despite paying roughly the same amount so far.

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Cheers

Here are my calcs assuming a 25 year mortgage, current average house price, 41k deposit (25% of current avg price). Deposit remains the same as I assume person will not lower deposit in response to drops. Cannot get excel in, have stuck it in paint. Comments welcome

Yeah your spreadsheet gives the impression that a 25% decrease in price would almost be offset by a mere 3% interest rate rise.

Lepista made a good point above though, that's something to consider.

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Yeah your spreadsheet gives the impression that a 25% decrease in price would almost be offset by a mere 3% interest rate rise.

Lepista made a good point above though, that's something to consider.

You are being a little selective in your data there. After a 20% drop you are saving money at any interest rate increase up to 10%. Obviously the further rates go up, the more likely significant falls are. You lose money only if the interest rates go beyond 7% and market, by some unknown miracle, does not respond by dropping like a stone

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Good call. Something to keep in mind.

With the example I gave you,

200k house, 50k deposit, 150k mortgage. Over the 10 years @ 5% = £120,360. <-- After the 10 years this person owes 75k more.

160k house, 50k deposit, 110k mortgage. Over the 10 years @ 9% = £120,480. <-- After the 10 years this person only owes 55k more. Despite paying roughly the same amount so far.

In addition, 10 years at say 2.5% inflation wage is now 1.28x better

after 5% inflation, wage is now 1.63x better

Therefore the remaining mortgage owed is 75/1.28= 58.6k

in scenario 2, it is more like 55/1.63 = 33.75k

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  • 261 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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