9 In 10 Borrowers Vulnerable To A Rate Rise

[bricor mortis]

My link

Reappraisal of the stats recently aired here re the amount of people facing increased mortgage payments when rates rise. ( From Yahoo finance )

Edited March 29, 2011 by bricor mortis

[Pent Up]

Link is broken.

[bricor mortis]

Link is broken.

Yes apologies, fixed now.

Edited March 29, 2011 by bricor mortis

[fluffy666]

Reappraisal of the stats recently aired here re the amount of people facing increased mortgage payments when rates rise. ( From Yahoo finance )

We would face increased rates, but realistically the base rate would have to hit about 8% before we had serious problems. Since the economy would be dead long before that, I'm not that worried..

[Pent Up]

http://uk.finance.yahoo.com/news/Rate-rises-hit-90-borrowers-yahoofinanceuk-2384057042.html?x=0&cmtnav=/mwphucmtgetnojspage/headcontent/main/2384057042//date/desc/11/s21428

With the base rate so low over the last few years, it's no great surprise that variable-rate mortgages have been so popular. After all, the initial rates are so much lower than on fixed-rate mortgage deals.

However, by going for a variable mortgage you leave yourself vulnerable to future fluctuations in the base rate. And according to one mortgage firm, an awful lot of borrowers find themselves in this position today.

Legal & General Investment Management reckons around 90% of active mortgages in the UK are on a variable rate.

This is far higher than figures from other sources, including the Financial Services Authority, which most recently suggested 68% of borrowers were on variable deals. But L&G reckons they have underestimated this figure, as they have failed to take into account the number of borrowers who moved onto variable rates once their fixed period ended.

Tim Drayson, economist at Legal & General Investment Management, explained: "90% of borrowers must be on variable rates because we have not seen the remortgage levels necessary for it to be otherwise."

And if he's right, that's an awful lot of borrowers who have some repayment pain on the way.

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Not if but when

While the base rate has sat at its current record low of 0.5% for two years, for much of that time there has been no indication that it would start to rise anytime soon.

That's no longer the case. For a while, Andrew Sentance was the lone voice on the Monetary Policy Committee (the body that sets the base rate) arguing for a rise, but he has since been joined by two other members. With inflation rocketing to more than double the committee's target, experts expect at least a couple of rate rises this year, with one likely as early as May.

[Pent Up]

We would face increased rates, but realistically the base rate would have to hit about 8% before we had serious problems. Since the economy would be dead long before that, I'm not that worried..

8% is not that unusual. I think people are getting lulled into a false sense of security because rates have been extreme now for two years. If rates normalise over the next few years we would easily see 6%. When I buy I'll be stress testing for 12% minimum.

[Riedquat]

8% is not that unusual. I think people are getting lulled into a false sense of security because rates have been extreme now for two years. If rates normalise over the next few years we would easily see 6%. When I buy I'll be stress testing for 12% minimum.

I don't think they've been lulled, I think they've simply been incredibly stupid and merely looked at what the current rate was at the time they got their mortgage. Why else would we have had all that nonsense about how low rates made it all so affordable? I've said all along that it makes sense to assume 10% and regard anything under that as a bonus, and that may not be cautious enough (your 12% doesn't sound unreasonable).

[fluffy666]

8% is not that unusual. I think people are getting lulled into a false sense of security because rates have been extreme now for two years. If rates normalise over the next few years we would easily see 6%. When I buy I'll be stress testing for 12% minimum.

I'd maintain that the only way rates could hit 8% without causing complete economic meltdown would be in the context of a serious wage/price spiral. Low IRs do tend to automatically lock themselves in in this way (as in: 10 years of low rates means you can't raise rates without causing huge political fallout.)

[Brave New World]

But within this data does it not give a 'mandate of the masses' to smply not allow for IR rases?

What point does the country as a whole get screwed by inflation and Sterling falling before they act - given the quantities on variable i bet the UK will have to be on its knees - politicians and majority of jornos (Halligan apart) simply do not want to nor are inclinded to report on the realities of our current position and the hear no evil see no evil mindset will continue to pervail until we have an ERM moment that they cannot cover up.

[Pent Up]

Better to raise rates and ruin the indebted than to have inflation ruin everyone. What's worse for the economy? High rates or high inflation?

[Pent Up]

I'd maintain that the only way rates could hit 8% without causing complete economic meltdown would be in the context of a serious wage/price spiral. Low IRs do tend to automatically lock themselves in in this way (as in: 10 years of low rates means you can't raise rates without causing huge political fallout.)

Or a strong recovery.

[mitchbux]

We would face increased rates, but realistically the base rate would have to hit about 8% before we had serious problems. Since the economy would be dead long before that, I'm not that worried..

We too would face increased rates as we are BoE +0.5%, but we checked what the repayments would be at 12%, and even that wouldn't put us at risk of serious problems.

[pilchardthecat]

I'm "vulnerable to a rate rise" in the sense that the tracker mortgage i took out when rates were between 6% and 7% would start to go up again.

The implication that this fact makes me somehow on the verge of imminent mortgage default and bankruptcy is a logical step too far.

Personally I would be happy for the base rate to be at 8% if it put sterling back at 2/1 with the dollar and made petrol cheaper... i'd probably be beter off

[Bobajobbob]

The advantage of a floater over a fixed mortgage is that you can normally overpay and/or cancel/transfer the mortgage with no penalty/cost.

Even the most conservative borrower today would struggle to take out a fixed when trackers are still significantly cheaper than fixed and offer the flexibility to change when the rate outlook turns more negative. Rates are not going to shoot up in the short to medium term so borrowers will have plenty of time to find the tipping point to shift to a fixed if market conditions become clearer with regards to the longer outlook for rates.

The only problem I see for those on floaters is that some may not have the equity to re mortgage at all given their LTV in the current environment. Being trapped on a floater is a different proposition to choosing floater over fixed for sound financial reasons.

(yes yes being trapped on a floater made me snigger too)

[Pent Up]

The advantage of a floater over a fixed mortgage is that you can normally overpay and/or cancel/transfer the mortgage with no penalty/cost.

Even the most conservative borrower today would struggle to take out a fixed when trackers are still significantly cheaper than fixed and offer the flexibility to change when the rate outlook turns more negative. Rates are not going to shoot up in the short to medium term so borrowers will have plenty of time to find the tipping point to shift to a fixed if market conditions become clearer with regards to the longer outlook for rates.

The only problem I see for those on floaters is that some may not have the equity to re mortgage at all given their LTV in the current environment. Being trapped on a floater is a different proposition to choosing floater over fixed for sound financial reasons.

(yes yes being trapped on a floater made me snigger too)

It's not as easy as that. As when the time comes that you want out of you're tracker because it's becoming too expensive the the fixed rate deals will have become expensive also.

You can still overpay and port fixed deals depending on the lender.

Edited March 29, 2011 by Pent Up

[exiges]

What's worse for the economy? High rates or high inflation?

When has the economy mattered ?

Out of high inflation or high rates which would be covered in the MSM with the handwringing of people booted out of "their" homes.

Edited March 29, 2011 by exiges

[Si1]

Or a strong recovery.

+1

German house prices saw prolonged and painful falls throughout the late 90s and 2000s, against a strong economy

[Bobajobbob]

It's not as easy as that. As when the time comes that you want out of you're tracker because it's becoming too expensive the the fixed rate deals will have become expensive also.

You can still overpay and port fixed deals depending on the lender.

Taking on a 5 YR fix at current levels vs running a floater with the free option to move to a fix at a later date? That is the question.

Of course it depends on how much you want to overpay and how far and fast you think base rates and fixed rate mortgage rates will rise, and of course the level of risk you want to take.

Personally and I say this as someone without a mortgage contemplating taking one out I would still go the floating route at this point in time. Yes rate will rise but in my opinion not hard and fast enough for fixed rate mortgage to dramatically rise from the levels they are at now. Sure there will be spikes but unless there is a dramatic change in the economy the risk is low. Of course this is only my personal opinion and from a position of relative security given I have a large deposit.

[caparn]

I think the term vulnerable is wrong. All it means is that 90% of mortgage holders aren't on fixed rates.

Most of them though would easily cope with a more normal rate of interest.

Some of the self certified (liar loan) mortgage holders might find it a bit difficult depending on by how much they overstated their income.

[#1 on West side]

Many arguments on this thread (rightly) point out that a tracker mortgage, e.g. BoE + 1%, is not in immediate danger in the near future. The chances of the base rate hitting , say 5% in the next 2 years, is relatively low. So, kudus to those who picked the lifetime tracker products.

I am looking at those that picked the tracker mortgages over two or three years, who I think are a large part of the "9 out of 10 borrowers". After all, why have a 10 year tracker at BoE + 3% when you can have a two year tracker at BoE + 2.5%. Seriously, I know quite a few sheeple who argue like that.

My point is, these borrowers are truly f**ked: Their term is nearly over and the new products on offer are at least double their existing rates, regardless of the BoE rate.

[manchester50]

I think many people are being too hopeful here.

I rolled off a fixed about four years ago and currently am on a variable of 2.5%. For the last four years I have been overpaying by 15-50%. I've several friends and colleagues (most public sector) who are now being hit by redundancies - they are worried about being unemployed (emotional, "what will I do?"), but not about the mortgage as they've all been overpaying during the years of low interest rates, and can now afford to be without work for pretty long periods.

I expect interest rates to rise, but slowly. I'd love them to soar as we're (all being well) in the process of completing the sale of our place and moving into rented - all money therefore going into savings whilst watching high house prices.