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7clubs

Irs - Can Some Please Help Me Understand Why They

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Genuine question.

With a 10 year fixed mortgage now available for under 4%, can the brighter minds here please explain how such a product can be offered, given the levels of economic uncertainty and myriad pressures which (ordinarily) would lead a wise-man to bet on IR rises?

Doubtless, house-prices remain over-valued in most areas; however, taking the overall cost to buy over the duration of a loan, is it not reasonable to state that taking a 10 year fix at 4-ish percent and making the 10% annual overpayment permitted (leaving not much left owing at the end of the ten years, I can't be bothered to work out how much now) would be a reasonable strategy? Sure, the Brucie cash-buyers of this world can argue against, but for the rest of us who must supplicate ourselves at the feet of a lender to put a roof over our heads, now would seem to be as good a time as any to bend over?

Obviously, this only applies in the context of borrowing to buy a home - but that's why we are here, no?

Cue job security, cannibals, lizards all combining to make this the dumbest plan since............

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Genuine question.

Actually, 3 separate questions but never mind :P

With a 10 year fixed mortgage now available for under 4%, can the brighter minds here please explain how such a product can be offered, given the levels of economic uncertainty and myriad pressures which (ordinarily) would lead a wise-man to bet on IR rises?

IR swaps below 3%+need to compete for good borrowers & create money out of thin air+UKFI & BOE will make good my RMBS if it goes south

Doubtless, house-prices remain over-valued in most areas; however, taking the overall cost to buy over the duration of a loan, is it not reasonable to state that taking a 10 year fix at 4-ish percent and making the 10% annual overpayment permitted (leaving not much left owing at the end of the ten years, I can't be bothered to work out how much now) would be a reasonable strategy?

If one can insulate self from NE (large deposit+secure job/income) then go for it.

Sure, the Brucie cash-buyers of this world can argue against, but for the rest of us who must supplicate ourselves at the feet of a lender to put a roof over our heads, now would seem to be as good a time as any to bend over?

Every EA will tell you exactly that

http://globaleconomicanalysis.blogspot.com/2011/08/five-rules-to-remember-when-dealing.html

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If house prices half in 2013, will you be happy to pay 4% on 300k, when you could have paid 8% on 150k?

If rates go up to 8%, do you doubt prices will drop? If rates do not go up, you can wait a year for prices to fall a bit more.

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Genuine question.

With a 10 year fixed mortgage now available for under 4%, can the brighter minds here please explain how such a product can be offered, given the levels of economic uncertainty and myriad pressures which (ordinarily) would lead a wise-man to bet on IR rises?

Doubtless, house-prices remain over-valued in most areas; however, taking the overall cost to buy over the duration of a loan, is it not reasonable to state that taking a 10 year fix at 4-ish percent and making the 10% annual overpayment permitted (leaving not much left owing at the end of the ten years, I can't be bothered to work out how much now) would be a reasonable strategy? Sure, the Brucie cash-buyers of this world can argue against, but for the rest of us who must supplicate ourselves at the feet of a lender to put a roof over our heads, now would seem to be as good a time as any to bend over?

Obviously, this only applies in the context of borrowing to buy a home - but that's why we are here, no?

Cue job security, cannibals, lizards all combining to make this the dumbest plan since............

Pretty much what matroskin said. Swap rate deals are obviously being done at rates to allow this. What yield will any reasonably "safe" retail security get you today?

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If house prices half in 2013, will you be happy to pay 4% on 300k, when you could have paid 8% on 150k?

Clearly not.

If rates go up to 8%, do you doubt prices will drop? If rates do not go up, you can wait a year for prices to fall a bit more.

Again, no. But after tracking the market (and this site) for at least 5 years, I am increasingly unconvinced that prices will fall by 50%, or that rates will rise to 8%. Bit of a chicken-and-egg situation you are describing. Lots of "ifs", too....I do not wish to be ascribed the moniker of Sibley II, but at the same time I consider myself to be a bear-ish pragmatist who lives in the real world with pressures, both financial and personal, when it comes to the potential purchase of a home.

Edit: I'm not good with this quote stuff, apologies.

Edited by 7clubs

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Actually, 3 separate questions but never mind :P

IR swaps below 3%+need to compete for good borrowers & create money out of thin air+UKFI & BOE will make good my RMBS if it goes south

If one can insulate self from NE (large deposit+secure job/income) then go for it.

Every EA will tell you exactly that

http://globaleconomicanalysis.blogspot.com/2011/08/five-rules-to-remember-when-dealing.html

Thank you for taking the time to address the point(s) I raised in a reasonable fashion.

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Again, no. But after tracking the market (and this site) for at least 5 years, I am increasingly unconvinced that prices will fall by 50%, or that rates will rise to 8%. Bit of a chicken-and-egg situation you are describing. Lots of "ifs", too....I do not wish to be ascribed the moniker of Sibley II, but at the same time I consider myself to be a bear-ish pragmatist who lives in the real world with pressures, both financial and personal, when it comes to the potential purchase of a home.

Edit: I'm not good with this quote stuff, apologies.

4% on 300k is the same as 8% on 150k. The arithmetic is the same. The only difference is the capital repayment. If you resent paying more capital back than the house ends up worth, it may be better to wait.

If rates go up, prices will fall. The two are connected, because most people have limits on what payments they can afford to carry.

So you have to make the decision based on your personal circumstances, of whether it's better to keep saving and hope to buy cheaper later on, or whether you think prices and rates will remain broadly flat, so it makes no difference when you buy. The other two options, flat prices with rising rates, or rising prices, look off the table. The first is impossible, the second would require big wage inflation.

If you are saving, I'd wait, simply because there is far more chance of price falls than price rises, and the longer you wait the less mortgage you need.

PS. I did feel when I read your post you could be a Sibley, sorry.

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I'm curious about this too.

How would this stack up? :-

Buy house for £300k

Deposit £200k

Mortgage £100k

Interest over 10 years at 3.99% = Interest cost of £21945

Mortgage fee = £1500

Total Cost = £23445 over the 10 years

This assumes repaying £10000 per year over the 10 year period. (is this even possible within the terms of the mortgage?)

Im currently paying around £1100 pm for a similar property, which assuming a rental increase of around 3% a year would come to a total rental cost of £147k.

If one were to invest the deposit over 10 years, a conservative rate of return would be 3%, or optimistically 6%, this would return either £68k or £158k over the ten years.

So, given a conservative rate of return on the deposit, the property would need to fall by over 25% before renting would have been a better plan. For the optimistic return of 6% the property would have to increase in value by 4% to break even.

Of course this assumes no maintenance on the property, insurance, etc, and rates of return on investing the deposit and rental inflation could vary wildly. Also, the loss of freedom being tied down for the period.

It's an interesting calculation anyhoo!

I also assume my calculations are fundamentally flawed, so I would appreciate the more mathematically gifted of you to point out my shortcomings!

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4% on 300k is the same as 8% on 150k. The arithmetic is the same. The only difference is the capital repayment. If you resent paying more capital back than the house ends up worth, it may be better to wait.

If rates go up, prices will fall. The two are connected, because most people have limits on what payments they can afford to carry.

So you have to make the decision based on your personal circumstances, of whether it's better to keep saving and hope to buy cheaper later on, or whether you think prices and rates will remain broadly flat, so it makes no difference when you buy. The other two options, flat prices with rising rates, or rising prices, look off the table. The first is impossible, the second would require big wage inflation.

If you are saving, I'd wait, simply because there is far more chance of price falls than price rises, and the longer you wait the less mortgage you need.

PS. I did feel when I read your post you could be a Sibley, sorry.

Clearly, but if prices fall by 50%, then obviously my lump-sum deposit represents a far greater percentage of the purchase price, leading to a lower level of borrowing (albeit at a higher interest rate, in this scenario).

PS. No offence taken at the Sibley remark, on re-reading my original post I realised the inevitable similarities....

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I'm curious about this too.

How would this stack up? :-

Buy house for £300k

Deposit £200k

Mortgage £100k

Interest over 10 years at 3.99% = Interest cost of £21945

Mortgage fee = £1500

Total Cost = £23445 over the 10 years

This assumes repaying £10000 per year over the 10 year period. (is this even possible within the terms of the mortgage?)

Im currently paying around £1100 pm for a similar property, which assuming a rental increase of around 3% a year would come to a total rental cost of £147k.

If one were to invest the deposit over 10 years, a conservative rate of return would be 3%, or optimistically 6%, this would return either £68k or £158k over the ten years.

So, given a conservative rate of return on the deposit, the property would need to fall by over 25% before renting would have been a better plan. For the optimistic return of 6% the property would have to increase in value by 4% to break even.

Of course this assumes no maintenance on the property, insurance, etc, and rates of return on investing the deposit and rental inflation could vary wildly. Also, the loss of freedom being tied down for the period.

It's an interesting calculation anyhoo!

I also assume my calculations are fundamentally flawed, so I would appreciate the more mathematically gifted of you to point out my shortcomings!

You seem to have missed out the symmetry of interest in the calculations.

If you start here

img3779.png

and work backwards the numbers should come out ok

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4% is 3.5% over base.

Before 2007 discount rates were common.

I wouldnt call 3.5% above base 'low'

Historically, I would agree.

In absolute terms, I would say that 4% is indeed low.

That is not to say that rates may not continue to fall (as they have over the last few weeks); however, when it comes to the security of a fixed rate over the effective duration of a loan (hence the reference to 10 year rates), I really can't see things falling much further.

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Again, no. But after tracking the market (and this site) for at least 5 years, I am increasingly unconvinced that prices will fall by 50%, or that rates will rise to 8%. Bit of a chicken-and-egg situation you are describing. Lots of "ifs", too....I do not wish to be ascribed the moniker of Sibley II, but at the same time I consider myself to be a bear-ish pragmatist who lives in the real world with pressures, both financial and personal, when it comes to the potential purchase of a home.

Edit: I'm not good with this quote stuff, apologies.

This may help fortify your flagging morale:

Property Snake

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It's possible because the lender doesn't take the risk of rates rising. When it's made the mortgage (or a pool of them) it hedges the risk by using the most simple derivative - an interest rate swap. This way, it gets a fluctuating interest rate in exchange for paying say a fixed rate of 3% for ten years. Some insurer or your pension fund chooses to carry the risk of/get the benefit of a fixed rate for 10 years. It's a better return than they'll get on gilts. Currently if they'd bought a 10 year UK government bond, they would get a yield of only 2.5%.

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Of course this assumes no maintenance on the property, insurance, etc, and rates of return on investing the deposit and rental inflation could vary wildly. Also, the loss of freedom being tied down for the period.

It's an interesting calculation anyhoo!

I also assume my calculations are fundamentally flawed, so I would appreciate the more mathematically gifted of you to point out my shortcomings!

If you put it into a sentence it looks a bit iffy:

Rents might not rise over ten years, reducing the 68k advantage by 15k if they stay level.

You could invest 200k much better than in a bank. Gold doubled in the last 2 years. This would make renting miles ahead.

Prices could fall 20 % in one year. This would make renting for one year miles better.

You could lose your job. This would make renting miles better, as the house would cost money to sell.

You will only be 68k ahead if you keep your job, if prices remain at historic highs, if rents keep going up and if you can't find your way to a bullion dealer.

That's a lot of ifs for these uncertain times.

But if house prices stay the same for ten years, and you keep your job

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I read a few months back that something like 85-90% of Brits are on variable rate mortgages.

I argue we'll never see base rates go up again.

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It's possible because the lender doesn't take the risk of rates rising. When it's made the mortgage (or a pool of them) it hedges the risk by using the most simple derivative - an interest rate swap. This way, it gets a fluctuating interest rate in exchange for paying say a fixed rate of 3% for ten years. Some insurer or your pension fund chooses to carry the risk of/get the benefit of a fixed rate for 10 years. It's a better return than they'll get on gilts. Currently if they'd bought a 10 year UK government bond, they would get a yield of only 2.5%.

Thank you, that is the sort of technical explanation I was looking for.

With due deference to the subsequent post, could it not be argued that, by taking out a 10 year fix, none of the above is my problem or my risk, so if the numbers stack up and I am confident in my job security and ability to re-pay (and indeed overpay) a loan, then the lights look green? Apologies if this goes against the underlying meme of this site, but we all have lives to lead, over and above posting on this forum.

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I read a few months back that something like 85-90% of Brits are on variable rate mortgages.

I argue we'll never see base rates go up again.

Never is a long time, AA3 - a decade on the other hand..... (anyone feel like Turning Japanese?)

Still, a historically low fix, just to feel safe....

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Again, no. But after tracking the market (and this site) for at least 5 years, I am increasingly unconvinced that prices will fall by 50%, or that rates will rise to 8%. Bit of a chicken-and-egg situation you are describing. Lots of "ifs", too....I do not wish to be ascribed the moniker of Sibley II, but at the same time I consider myself to be a bear-ish pragmatist who lives in the real world with pressures, both financial and personal, when it comes to the potential purchase of a home.

Edit: I'm not good with this quote stuff, apologies.

Base rates have nearly, nearly, zero chance of "soaring" any time soon. Ofc that doesn't mean there might not be a situation in which you are only able to obtain an 8%

mortgage rate, however this scenario is only slightly more likely than the base rate soaring scenario.

So many people have been suckered into taking higher rate fixes on the back of this 'interest rates to soar, bond market collapse' nonsense, Interest rates do note soar when nearly the whole fvcking world is in a balance sheet recession. FFS, we're seeing fees being charged on bank deposits and negative nominal yields on TIPS.

If you are contemplating a situation in which you have say 30% equity then go for it and get a nice cheap tracker. Ofc you do need to consider the possibility of capital loss but as long as you have 25-30% equity there are so many people between you and the cliff edge you ought to be safe. If not, then the savings of the STRs are at much or more risk than your own position.

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Base rates have nearly, nearly, zero chance of "soaring" any time soon.

Base rates - no. Direct and indirect taxes - yes. Read the other thread about unemployed singles paying 100% CT, for instance.

Ofc you do need to consider the possibility of capital loss but as long as you have 25-30% equity there are so many people between you and the cliff edge you ought to be safe. If not, then the savings of the STRs are at much or more risk than your own position.

As long as one does not MEW then all fine and dandy. If one MEWs out of necessity, like paying kids university fees/paying elders' care home fees etc then cliff edge becomes much closer.

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Base rates have nearly, nearly, zero chance of "soaring" any time soon. Ofc that doesn't mean there might not be a situation in which you are only able to obtain an 8%

mortgage rate, however this scenario is only slightly more likely than the base rate soaring scenario.

So many people have been suckered into taking higher rate fixes on the back of this 'interest rates to soar, bond market collapse' nonsense, Interest rates do note soar when nearly the whole fvcking world is in a balance sheet recession. FFS, we're seeing fees being charged on bank deposits and negative nominal yields on TIPS.

If you are contemplating a situation in which you have say 30% equity then go for it and get a nice cheap tracker. Ofc you do need to consider the possibility of capital loss but as long as you have 25-30% equity there are so many people between you and the cliff edge you ought to be safe. If not, then the savings of the STRs are at much or more risk than your own position.

Thanks, Scepticus - yours is an opinion I respect (and, in this case at least, broadly agree with).

You have touched on the point I was trying to dig into - there is much talk of the "markets" forcing up interest rates, hyperinflation, deflation, TEOTWAWKI, yada, yada - but the bottom line is that almost everyone is skint (indeed, hugely in debt), from the lowliest individual to the loftiest of nations, added to which there is surely enough evidence from policy decisions over the last few years to suggest that TPTB will do whatever it takes to stop the world from blowing up, which means low/zero/negative interest rates for a very long time indeed.

And that, in a layman's nutshell, is that.

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Thanks, Scepticus - yours is an opinion I respect (and, in this case at least, broadly agree with).

You have touched on the point I was trying to dig into - there is much talk of the "markets" forcing up interest rates, hyperinflation, deflation, TEOTWAWKI, yada, yada - but the bottom line is that almost everyone is skint (indeed, hugely in debt), from the lowliest individual to the loftiest of nations, added to which there is surely enough evidence from policy decisions over the last few years to suggest that TPTB will do whatever it takes to stop the world from blowing up, which means low/zero/negative interest rates for a very long time indeed.

And that, in a layman's nutshell, is that.

You're welcome 7clubs. Markets are forcing DOWN interest rates, not up! That said I don't share your optimism that TPTB are not going to squabble and bicker for quite some time before matters come to a head, so I think the economy is in for at least one more near death experience. So the danger is not soaring rates, but losing one's job. Also I'd avoid london where the bankster cull is just starting.

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You're welcome 7clubs. Markets are forcing DOWN interest rates, not up! That said I don't share your optimism that TPTB are not going to squabble and bicker for quite some time before matters come to a head, so I think the economy is in for at least one more near death experience. So the danger is not soaring rates, but losing one's job. Also I'd avoid london where the bankster cull is just starting.

I agree with all of that - perhaps instead of "markets" I should have written "bond vigilantes" or some such, as seems to be the commonly-held belief by many on here.

I am not at all optimistic about the prospects for the economy, nor about the actions of TPTB, I am merely trying to reach a common-sense view as to how best to proceed with my financial life, free of the noise that this site inevitably throws into the equation. I suspect I am not alone.

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You're welcome 7clubs. Markets are forcing DOWN interest rates, not up! That said I don't share your optimism that TPTB are not going to squabble and bicker for quite some time before matters come to a head, so I think the economy is in for at least one more near death experience. So the danger is not soaring rates, but losing one's job. Also I'd avoid london where the bankster cull is just starting.

Do you expect job losses to represent the moral hazard? If not, what will be? If no moral hazard this time, what is likely for the future?

Do you expect people to see moral hazard in a boiling frog syndrome? Or just a lemmings off a cliff situation?

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Do you expect job losses to represent the moral hazard? If not, what will be? If no moral hazard this time, what is likely for the future?

Do you expect people to see moral hazard in a boiling frog syndrome? Or just a lemmings off a cliff situation?

I expect to see a secular decline in moral hazard now to some baseline level of moral hazard which is always with us no matter what. Not overnight mind!

BTW, low rates are not moral hazard. Low rates is what you get when overall borrowing cannot rise.

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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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