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Henrik

What Will Happen To Fixed Rate Mortgages When Base Rates Rise?

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What does HPC think will happen to fixed rate mortgages when interest rates rise?

I used to think the answer was clear cut, that they would rise, and probably rise faster than the base rate, but there was a graph posted earlier in the week by someone on here (cant find it now), which compared fixed rates to base rates, and there was a clear disconnect between rates. I.e fixed rates hardly fell at all.

I'm starting to think something similar might happen when base rates start rising too.

All in all, it's very depressing, but I'm half thinking of getting one of those 6% fixes and buying something. The interest portion would work out at about 1300 a month, which is 30% more than my rent, but the house i'm renting is a bit of a hovel and the garage is damp and leaky, causing all my tools to rust etc etc. I'd be getting a repayment mortgage of course, but the interest portion is the one i'm interested in.

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What does HPC think will happen to fixed rate mortgages when interest rates rise?

I used to think the answer was clear cut, that they would rise, and probably rise faster than the base rate, but there was a graph posted earlier in the week by someone on here (cant find it now), which compared fixed rates to base rates, and there was a clear disconnect between rates. I.e fixed rates hardly fell at all.

I'm starting to think something similar might happen when base rates start rising too.

All in all, it's very depressing, but I'm half thinking of getting one of those 6% fixes and buying something. The interest portion would work out at about 1300 a month, which is 30% more than my rent, but the house i'm renting is a bit of a hovel and the garage is damp and leaky, causing all my tools to rust etc etc. I'd be getting a repayment mortgage of course, but the interest portion is the one i'm interested in.

This is a very good question.

My view is that the monetary authorities are well behind the assumed inflation curve. Markets know this which is why the curve has steepened and fixed rates have become increasingly high relative to the base rate.

The longer that the base rate remains low, the more the market will become convinced that the BoE has lost control of inflation.

When the BoE finally throws in the towel, the market will feel vindicated and the curve will steepen further for 6 to 12 months making fixed rates even more expensive relative to SVR deals.

Once the base rate rises to a level where real rates are positive, the curve will probably flatten again which will restore the traditional relationship between fixed and variable rates in the mortgage market.

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Nothing

Picture3.gif

EDIT

Someone aslo asked about me doing a chart like this

AllRates1995.gif

That is the funniest thing I've seen in ages, thanks very much! I think you're wrong about nothing happening, though. I think the margins would be maintained.

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I think those with high LTV will get lower fixed rates than those with poorer equity in the property.

Those with good LTV ratios will still get good deals, meanwhile those who borrowed will get shafted with higher rates which will probably cause a default tsunami.

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That is the funniest thing I've seen in ages, thanks very much! I think you're wrong about nothing happening, though. I think the margins would be maintained.

Margins maintained? Are having a laugh? So at 5% base rates a 5 year fix would be around 10%!

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Nothing

Picture3.gif

EDIT

Someone aslo asked about me doing a chart like this

AllRates1995.gif

So when interest rates were around 4% some years back a lot of mortgage rates were roughly the same as today. Sort of destroys the idea of buying now to lock in a low rate!

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Margins maintained? Are having a laugh? So at 5% base rates a 5 year fix would be around 10%!

No you are right. Banks will keep their fixed rates the same because their sense of social responsibility will overwhelm the loss of profit.

The real answer is that it depends upon the entire forward curve, and a few other things besides, but probably they will move up.

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Figgy, thats the one! Thanks!

Pytyr, not sure that would happen, as it didnt happen previously. A premium for fixed, yes, but probably not 5%

Interesting conment about the LTV vs rates. This is already happening from where im looking.

My personal opinion (at the moment) is that the inflation cat is out of the bag, and rising wage increases are here already, which leads me to believe there might not be huge nominal falls to come, unfortunately. I used to be in the 50% off nominal values camp, but it doesnt seem to be panning out that way.

Edited by Henrik

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So when interest rates were around 4% some years back a lot of mortgage rates were roughly the same as today. Sort of destroys the idea of buying now to lock in a low rate!

It's almost as if the mortgage companies are just desperate to get people off base-rate-linked SVRs, and so will claim that they are about too take off..

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Margins maintained? Are having a laugh? So at 5% base rates a 5 year fix would be around 10%!

The 5 year fixed mortgage rate = 5 year swap rate + bank funding spread over swaps + margin.

Because the market determined curve has steepened due to the massive manipulation of administered rates, the 5 year fixed rate is close to its historical highs against the Bank Rate. Because banks (in general but in the UK in particular) are considered to be very weak, bank funding spreads are very high relative to historic norms. Because banks are weak, they are trying to rebuild margins.

The net result is that long term fixed rates are historically high (and will possibly rise further) because our banks are in a very weak position.

I know that it is not a popular view but it is in consumers' best interests to live in a country with a strong and sound banking sector. We do not live in such a country.

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No you are right. Banks will keep their fixed rates the same because their sense of social responsibility will overwhelm the loss of profit.

The real answer is that it depends upon the entire forward curve, and a few other things besides, but probably they will move up.

The banks may seek to keep rates low not because of social responsibility but because repossessing could crash the housing market and wipe out the bank. Once they are forced into a fire sale the losses will become realised on the balance sheet. This is something the bankers fear more than anything else.

The good old taxpayer hasn't got the money to bailout the banks again.

The bankers are between a rock and hard place.

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No you are right. Banks will keep their fixed rates the same because their sense of social responsibility will overwhelm the loss of profit.

The real answer is that it depends upon the entire forward curve, and a few other things besides, but probably they will move up.

Fixed rates will rise, as they already are but if they maintained BR+ 5% they mayaswell just withdraw the deal as no one would take it up.

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The 5 year fixed mortgage rate = 5 year swap rate + bank funding spread over swaps + margin.

Because the market determined curve has steepened due to the massive manipulation of administered rates, the 5 year fixed rate is close to its historical highs against the Bank Rate. Because banks (in general but in the UK in particular) are considered to be very weak, bank funding spreads are very high relative to historic norms. Because banks are weak, they are trying to rebuild margins.

The net result is that long term fixed rates are historically high (and will possibly rise further) because our banks are in a very weak position.

I know that it is not a popular view but it is in consumers' best interests to live in a country with a strong and sound banking sector. We do not live in such a country.

I would agree with this, except the last sentence. We need a sound financial sector to borrow money because of price rises caused by the strong financial sector.

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The banks may seek to keep rates low not because of social responsibility but because repossessing could crash the housing market and wipe out the bank. Once they are forced into a fire sale the losses will become realised on the balance sheet. This is something the bankers fear more than anything else.

The good old taxpayer hasn't got the money to bailout the banks again.

The bankers are between a rock and hard place.

However stupid it sounds, banks do this all the time. Raising credit card rates for people at risk of defaulting, for example.

A sensible bank would cut the rates for these people, but for some reason banks prefer to get recovery on the default.

@PentUp:

The spread isn't permanently fixed, but I would expect a small change in base rates to become a similar small change in swap rates and bank spreads to stay roughly fixed in the short-term.

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I would agree with this, except the last sentence. We need a sound financial sector to borrow money because of price rises caused by the strong financial sector.

A strong and sound financial sector arises from a long term business model reliant on cash flow from economic activity to repay debt.

A weak and vulnerable financial sector arises from a short term business model reliant on capital gains from speculation to repay debt.

My opinion is that the UK financial sector is weak and vulnerable rather than strong and sound.

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That is the funniest thing I've seen in ages, thanks very much! I think you're wrong about nothing happening, though. I think the margins would be maintained.

Margins maintained? Are having a laugh? So at 5% base rates a 5 year fix would be around 10%!

There is no way they can maintain a 5 percent margin. They haven't got much take up of their fix rates deals at present. I'd agree with them creeping up a little, but not a lot.

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Figgy, thats the one! Thanks!

Pytyr, not sure that would happen, as it didnt happen previously. A premium for fixed, yes, but probably not 5%

Interesting conment about the LTV vs rates. This is already happening from where im looking.

My personal opinion (at the moment) is that the inflation cat is out of the bag, and rising wage increases are here already, which leads me to believe there might not be huge nominal falls to come, unfortunately. I used to be in the 50% off nominal values camp, but it doesnt seem to be panning out that way.

Where?

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Where?

I know several people in my sector who have had "inflation or above" pay rises. Arguably a small sample, but in my experience wages are rising.

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Where?

Didn't post office workers just a 3%+ rise after pushing for it? It's not quite inflation busting but it's not bad if you ask me

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What does HPC think will happen to fixed rate mortgages when interest rates rise?

I used to think the answer was clear cut, that they would rise, and probably rise faster than the base rate, but there was a graph posted earlier in the week by someone on here (cant find it now), which compared fixed rates to base rates, and there was a clear disconnect between rates. I.e fixed rates hardly fell at all.

I think they'll stay much the same.

The long term slow rise in interest rates is already priced into today's fixed rates so when that happens the rates don't need to move.

They only move if there is a baase rate change which was not the one that was expected

tim

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I know several people in my sector who have had "inflation or above" pay rises. Arguably a small sample, but in my experience wages are rising.

Same here. We all got pay rises of between 2-3x inflation.

The gap between wealthy and poor is just getting bigger.. those in cushy jobs already are having raises while those struggling aren't.

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Figgy, thats the one! Thanks!

Pytyr, not sure that would happen, as it didnt happen previously. A premium for fixed, yes, but probably not 5%

Interesting conment about the LTV vs rates. This is already happening from where im looking.

+1

+1

and +1

My personal opinion (at the moment) is that the inflation cat is out of the bag, and rising wage increases are here already, which leads me to believe there might not be huge nominal falls to come, unfortunately. I used to be in the 50% off nominal values camp, but it doesnt seem to be panning out that way.

I still think we will have a 20-30% real term fall in the next 2-3 years, via roughly half/half inflation/nominal falls.

It is not possible to know what will happen with the world or British economy. There are too many unusual processes going on at the same time all over the world.

But there is only one safe strategy to minimise housing cost: To buy first a small, cheap property, (it could be on a 5 years fixed), build up equity and or savings as fast as possible, and only then upgrade.

If one borrows other peoples' properties or money, there will always be a cost to it. To be financially independent, we have to accumulate our own capital. Minimising rent/interest is essential here.

Buying at the right time is essential too, of course. And it is not yet time to buy. At least not here in the south. Perhaps after the summer we may start to have a few opportunities, for those really desperate to buy.

.

Edited by Tired of Waiting

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  • 284 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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