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JimSkank

Rate Rises V Hp Declines

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The following table shows the house price declines needed to offset movements in mortgage rates (y) with a given deposit (x% of house value) on an associated loan of any size.

        x=10%   x=25%   x=50%   x=75%y=+1%    -3.6%   -3.0%   -2.0%   -1.0%y=+2%    -6.9%   -5.7%   -3.8%   -1.9%y=+3%   -10.0%   -8.3%   -5.5%   -2.8%y=+4%   -12.8%  -10.7%   -7.1%   -3.6%y=+5%   -15.5%  -13.0%   -8.6%   -4.3%

Eg, If you were buying with a 25% deposit and if rates rise by 3% tomorrow, then a corresponding fall in house prices of at least 8.3% would be necessary to ensure net positive impact.

Assumptions

- The rate variance applies only for the first 5 years of a 25 year mortage

- Decline in HP's stated, effecting the offset calculation (difference in payments for first 5 years + difference in outstanding loan liability at year 5).

- No discounting for present value in first 5 years.

Of course, there are further considerations regarding rent, interest etc, which will differ on individual circumstances but I have tried to isolate the impact of the increased cost of money against potential future falls.

For me personally, buying with 50% deposit, I would expect an increase in future mortgage rates of +3% to negatively impact HPD by more than 5.5% and so gives me confidence to wait it out.

Happy to answer questions on calculation.

Jim

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There are slightly more variables as you pointed out, but yes - I'm a fan of the thinking that you have to balance rates with prices. The bottom for one is not the bottom for the other.

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The following table shows the house price declines needed to offset movements in mortgage rates (y) with a given deposit (x% of house value) on an associated loan of any size.

        x=10%   x=25%   x=50%   x=75%y=+1%    -3.6%   -3.0%   -2.0%   -1.0%y=+2%    -6.9%   -5.7%   -3.8%   -1.9%y=+3%   -10.0%   -8.3%   -5.5%   -2.8%y=+4%   -12.8%  -10.7%   -7.1%   -3.6%y=+5%   -15.5%  -13.0%   -8.6%   -4.3%

Eg, If you were buying with a 25% deposit and if rates rise by 3% tomorrow, then a corresponding fall in house prices of at least 8.3% would be necessary to ensure net positive impact.

Assumptions

- The rate variance applies only for the first 5 years of a 25 year mortage

- Decline in HP's stated, effecting the offset calculation (difference in payments for first 5 years + difference in outstanding loan liability at year 5).

- No discounting for present value in first 5 years.

Of course, there are further considerations regarding rent, interest etc, which will differ on individual circumstances but I have tried to isolate the impact of the increased cost of money against potential future falls.

For me personally, buying with 50% deposit, I would expect an increase in future mortgage rates of +3% to negatively impact HPD by more than 5.5% and so gives me confidence to wait it out.

Happy to answer questions on calculation.

Jim

Looks about right from what I have worked out for me personally. Bring on 5%+ rates :)

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The following table shows the house price declines needed to offset movements in mortgage rates (y) with a given deposit (x% of house value) on an associated loan of any size.

        x=10%   x=25%   x=50%   x=75%y=+1%    -3.6%   -3.0%   -2.0%   -1.0%y=+2%    -6.9%   -5.7%   -3.8%   -1.9%y=+3%   -10.0%   -8.3%   -5.5%   -2.8%y=+4%   -12.8%  -10.7%   -7.1%   -3.6%y=+5%   -15.5%  -13.0%   -8.6%   -4.3%

Eg, If you were buying with a 25% deposit and if rates rise by 3% tomorrow, then a corresponding fall in house prices of at least 8.3% would be necessary to ensure net positive impact.

Assumptions

- The rate variance applies only for the first 5 years of a 25 year mortage

- Decline in HP's stated, effecting the offset calculation (difference in payments for first 5 years + difference in outstanding loan liability at year 5).

- No discounting for present value in first 5 years.

Of course, there are further considerations regarding rent, interest etc, which will differ on individual circumstances but I have tried to isolate the impact of the increased cost of money against potential future falls.

For me personally, buying with 50% deposit, I would expect an increase in future mortgage rates of +3% to negatively impact HPD by more than 5.5% and so gives me confidence to wait it out.

Happy to answer questions on calculation.

Jim

most useful well done!

I did that last week for my particular situation (35% deposit) and rate increase (+0.5%) as my HSBC reserved rate comes to an end soon.

very useful to have a generic "model", are you happy with it or do you need it checked?

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Being one to always state the bleeding obvious, the higher the deposit you have, the better this starts looking.

As I stated on a thread yesterday, a corner has been turned. For most people it appears to be better to hold off from buying now. This is a 180 degree turn around from the build up to '07 where people were buying out of fear of being priced-out if they didn't make a purchase.

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most useful well done!

I did that last week for my particular situation (35% deposit) and rate increase (+0.5%) as my HSBC reserved rate comes to an end soon.

very useful to have a generic "model", are you happy with it or do you need it checked?

Thanks, and I think its ok, have kept it as simple as possible. For example there is no variance in rates achievable on different LTV's, or benefits of saving greater deposits due to not buying etc..

Edited by JimSkank

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Being one to always state the bleeding obvious, the higher the deposit you have, the better this starts looking.

As I stated on a thread yesterday, a corner has been turned. For most people it appears to be better to hold off from buying now. This is a 180 degree turn around from the build up to '07 where people were buying out of fear of being priced-out if they didn't make a purchase.

But now most are essentially priced out because of the demand for large deposits. So they were kind of right - in the wrong way. Don't get me wrong this phase where no one can buy a house is needed it's just frustrating that if I had purchased in 07 I could be about 50% through a 100% mortgage and in my area (Taunton) house prices haven't budged at all, if anything the asking price has gone up by 15% to 20% to counter people like me putting in -15% offers but then some divvy will come along and pay full asking price or something silly like 2% off thinking they are getting a good deal!

I think you are correct we have come a long way and the sentiment now is "why bother buying, house prices are not going anywhere and if they are it will be down", but something is keeping the market high and gently ticking over and I think its stubborn sellers that feel entitled to money they have already spent not realising investments (I hate it when people refer to housing as an investment) can go down as well as up.

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A lot of people are going to be unable to cope with a significant increase in interest rates. From 2005 to 2007 50% of all mortgages were self certified. As only 13% of all people are self employed so would actually need one and that these mortgages generally charge a higher rate of interest that other mortgages one can validly make the assumption that about 37% of all mortgages taken out in this period were by people who overstated their income to borrow more money than they could reasonably be expected to repay.

There will be an awful lot of houses repossessed if base interest rates were to rise to a more normal 5%.

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A lot of people are going to be unable to cope with a significant increase in interest rates. From 2005 to 2007 50% of all mortgages were self certified. As only 13% of all people are self employed so would actually need one and that these mortgages generally charge a higher rate of interest that other mortgages one can validly make the assumption that about 37% of all mortgages taken out in this period were by people who overstated their income to borrow more money than they could reasonably be expected to repay.

There will be an awful lot of houses repossessed if base interest rates were to rise to a more normal 5%.

...so the people that lied to buy ie lied so that they could buy, meaning that they couldn't have afforded it, will be repossessed.....in other words if they hadn't have had that opportunity to buy something that was unaffordable had they not lied and had the interest rate been so low....they would not be in the house they are living in today, so being repossessed puts them in the same situation they would have been in anyway....a renter. ;)

Edit: or living in a smaller home that they can afford.

Edited by winkie

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...so the people that lied to buy ie lied so that they could buy, meaning that they couldn't have afforded it, will be repossessed.....in other words if they hadn't have had that opportunity to buy something that was unaffordable had they not lied and had the interest rate been so low....they would not be in the house they are living in today, so being repossessed puts them in the same situation they would have been in anyway....a renter. ;)

Edit: or living in a smaller home that they can afford.

Yes but added to that they will have lived on the breadline for many years to make the mortgage payments each month and then be left with a loss of their 15% deposit that they would have had to provide to get a self certified mortgage. So probably just be in the same situation they were before the property boom.

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A lot of people are going to be unable to cope with a significant increase in interest rates. From 2005 to 2007 50% of all mortgages were self certified. As only 13% of all people are self employed so would actually need one and that these mortgages generally charge a higher rate of interest that other mortgages one can validly make the assumption that about 37% of all mortgages taken out in this period were by people who overstated their income to borrow more money than they could reasonably be expected to repay.

There will be an awful lot of houses repossessed if base interest rates were to rise to a more normal 5%.

the thing is though is that it is often easier to make the payments than it is to borrow the amount required.

anyone that did a self cert is laughing now since rates were slashed to 0.5%

there would be a lot of repo's if rates rose but they arent going to for exactly that reason.

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the thing is though is that it is often easier to make the payments than it is to borrow the amount required.

anyone that did a self cert is laughing now since rates were slashed to 0.5%

there would be a lot of repo's if rates rose but they arent going to for exactly that reason.

Yes, I have a friend who stated his income was £54k on a self certified mortgage when he was really only earning £27k before tax. He had a deposit of £50k from the profit from a previous house and then bought a house for £330k. So I suspect he has a £280k mortgage. He is managing to make all the repayments at the moment and even overpaying. But it is not much fun to live like that, no heating in winter, driving a 15 year old car and having to watch every pound he spends. His house is now worth about £280k, so a lot of effort for no gain.

Edited by caparn

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Yes, I have a friend who stated his income was £54k on a self certified mortgage when he was really only earning £27k before tax. He had a deposit of £50k from the profit from a previous house and then bought a house for £330k. So I suspect he has a £280k mortgage. He is managing to make all the repayments at the moment and even overpaying. But it is not much fun to live like that, no heating in winter, driving a 15 year old car and having to watch every pound he spends. His house is now worth about £280k, so a lot of effort for no gain.

I would say there are quite a few living like that today....only something minor has to happen and something that is barely affordable becomes a big problem.....no room for manoeuvre. ;)

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I would say there are quite a few living like that today....only something minor has to happen and something that is barely affordable becomes a big problem.....no room for manoeuvre. ;)

Yes, according to my calculations just between 2005 and 2007 there were nearly 4 million houses sold, so my best guess is that of these 1.4 million were obtained by fraudulent self certified mortgages. Which probably amounts to about £100 billion of fraud. I also know that doubling of salary is not at all out of the ordinary for this type of mortgage, in fact this fraud was uncovered by the BBC Money Program in 2003 citing an example of someone on £30k who stated their income as £104k. Though it does say typical amounts were to get a mortgage increased from £150k to £220k loan, which represents a 47% increase in salary from actual.

Edited by caparn

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Yes, I have a friend who stated his income was £54k on a self certified mortgage when he was really only earning £27k before tax. He had a deposit of £50k from the profit from a previous house and then bought a house for £330k. So I suspect he has a £280k mortgage. He is managing to make all the repayments at the moment and even overpaying. But it is not much fun to live like that, no heating in winter, driving a 15 year old car and having to watch every pound he spends. His house is now worth about £280k, so a lot of effort for no gain.

no one said it would be easy and I suspect that he never expected it to be either. But, so long as he makes the payments then he will have pulled it off and have a house that he would not have been able to buy otherwise. There was a time when this made sense and that obviously isnt now.

Whether it is really worth living on pennies to be in a bigger house that you cant ever go out of because you cant afford to is another matter.

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no one said it would be easy and I suspect that he never expected it to be either. But, so long as he makes the payments then he will have pulled it off and have a house that he would not have been able to buy otherwise. There was a time when this made sense and that obviously isnt now.

Whether it is really worth living on pennies to be in a bigger house that you cant ever go out of because you cant afford to is another matter.

He bought it because he thought houses would carry on going up like they had before. He bought his first house in 2002 for £70k and sold it for £120k in 2006. The obvious conclusion for him was in 5 year's time a £330k house will be worth over £500k, so an easy 200k profit for him. He's a single bloke, there is no way he needs a 4 bed detached house for himself.

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He bought it because he thought houses would carry on going up like they had before. He bought his first house in 2002 for £70k and sold it for £120k in 2006. The obvious conclusion for him was in 5 year's time a £330k house will be worth over £500k, so an easy 200k profit for him. He's a single bloke, there is no way he needs a 4 bed detached house for himself.

Like I said, there was a time that it made sense.

He may not need a 4 bed but given the bubble it made sense didnt it?

We cant all slate anyone that had anything to do with houses because of the hpc mantra, At the time it made sense and was an easy way of making money. Why shouldnt people have done it?

And so long as he keeps up with the payments then he will still have ahouse that he otherwise would not have been able to borrow enough to buy wont he?

I largely suspect that given time he will be the smug one.

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Like I said, there was a time that it made sense.

He may not need a 4 bed but given the bubble it made sense didnt it?

We cant all slate anyone that had anything to do with houses because of the hpc mantra, At the time it made sense and was an easy way of making money. Why shouldnt people have done it?

And so long as he keeps up with the payments then he will still have ahouse that he otherwise would not have been able to borrow enough to buy wont he?

I largely suspect that given time he will be the smug one.

Well it was a gamble, he has a lot of catching up to do to be the smug one. He currently has a net worth of nothing and has been working really hard and spending nothing on himself for the last 5 years.

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I have to agree, you sound so desperate for your so called mate to fall on his ****. I agree if someone buys a second or third house for pure profit then fair game I think personally it is a bit of justice when they get their fingers burnt because I think it is unfair what has happened in regard to the housing in this country but if someone buys a house for themselves then I wish them good luck, not to make money but to have a happy life. It is a simple question if you want to buy and you have the opportunity then go for it. If you dont want to buy and you want to rent then fair enough thats cool with me, thats your choice, happy days. Everyone loves to moan !!!!!!

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Well it was a gamble, he has a lot of catching up to do to be the smug one. He currently has a net worth of nothing and has been working really hard and spending nothing on himself for the last 5 years.

It was a gamble but in the long run then so long as he can keep up then he will be a winner.

Look at everyone else. Borrow as much as you can to buy the biggest house. Reality is that they are still doing pretty well.

So we are having a cyclical downturn. Look at historical prices. Houses follow only one general trend.

I bought a flat in 2000. I couldnt live in it as I was serving abroad. I didnt want a flat and I didnt want to be a landlord but I couldnt save at the same rate a houses were going up. If I had done nothing then I would have fallen far behind and become priced out.

Did I do the wrong and evil thing and add to the situation? Yes.

Do I care? No.

I did what I needed to and what made sense at the time.

I wont pass judgement on anyone that was simply trying to do better for themselves in what seemed an obvious bet. What else do you expect of people?

hpc is becoming a load of sh1t if people can not understand human nature and what was a sensible course of action at the time.

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Rich, i agree mate. If you said I bought 5 flats and you were worried about the slow down then I would say tough luck ! but you decided to put you future in a flat. Well done I say that makes sense to me. All this moaning and I hope people lose houses etc is a joke and it is exactly what is wrong with this country. If you had decided to put your money in shares or a pension then no one would moan but because you have done something sensible then its wrong and people want you to fail. I hope everyone gets the home they deserve and I disagree with large individual landlords but if people think that 5 / 6 % interest rates will cause 50 % crashes then think again. Yes there will be less money out there for individuals but the medium to large houses in good areas have that type of long term interest rate built in. On top of this my guess would be that it will take another 2 / 3 years to get to 5/6 %. I think if you want to buy then around about now is the time. Take it or leave it !

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Rich, i agree mate. If you said I bought 5 flats and you were worried about the slow down then I would say tough luck ! but you decided to put you future in a flat. Well done I say that makes sense to me. All this moaning and I hope people lose houses etc is a joke and it is exactly what is wrong with this country. If you had decided to put your money in shares or a pension then no one would moan but because you have done something sensible then its wrong and people want you to fail. I hope everyone gets the home they deserve and I disagree with large individual landlords but if people think that 5 / 6 % interest rates will cause 50 % crashes then think again. Yes there will be less money out there for individuals but the medium to large houses in good areas have that type of long term interest rate built in. On top of this my guess would be that it will take another 2 / 3 years to get to 5/6 %. I think if you want to buy then around about now is the time. Take it or leave it !

Thing is, it wasn't his money he was putting in the housing market, it was the banks. And it's the banks that we, the tax payer, had to rescue which caused the Bank of England to increase the monetary base by £1.3 trillion Office of national statistics. Self certified mortgage fraud was so great in 2005 to 2007 (and a few years before that too but not to the same extent) that it cause a lot of extra money to be put into the housing market that should never have gone in. This extra money going into the housing market added an extra 16% on the price of each house. So if you purchased a house in 2005 for £200k, then about £30k of that was just because people were borrowing more money than they would have been allowed to by taking out fraudulent self certified loans. You may look at it as a harmless bit of enterprise but it's one of the main causes of the current financial crisis and we are all paying for it now.

Edited by caparn

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Interesting figures, thanks. I always thought it was a concern that, with a mortgage involved, as rates rise a 'cheaper' house would cost as much as a more expensive one now. I can remember my first house, a 3 bed detached bungalow I bought for £49,500 took just as much of my wage then (rate was around 7%) as would be buying a £200,000 house now on a rate of 3.75%. Basically, we have to hope that prices crash whilst rates stay low.

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  • 312 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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