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"dramatic Scenio" Of Pushing Irs Up To 1.75% Only Causes Jump Of £600 A Year

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http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10662048/Mortgage-borrowers-warned-of-drastic-scenario-600-repayment-rise-by-next-year.html

Home owners could see their mortgage payments rise by £252 a year on average by the end of next year if interest rates start rising at a moderate pace, a report forecasts. It also forecast that a "drastic scenario" of Bank Rate at 1.75pc by the end of 2015, which it deemed feasible, would push up typical annual repayments by £576, or by £48 a month.

Research by the Centre for Economic and Business Research (CEBR) found that average mortgage payments across the UK could rise from their current monthly levels of £666 per month to £687 a month in the most likely scenario. This would add an extra £21 a month to payments, or £252 a year. The UK Bank Rate, which has been kept at a historic 0.5pc low for five years, has helped to keep payments relatively affordable, but signs that the economy is improving have prompted speculation about possible rises being on the horizon.

That renewed optimism has already shifted the pricing of new mortgage deals. The best five-year fixed rate has risen from 2.44pc in July to 2.95pc (available from Natwest and Woolwich). The Financial Flexibility report, undertaken for Barclays Mortgages, assumed that the "most likely" scenario is that interest rates will rise at a moderate pace, which for its model would involve the base rate rising to 0.75pc in May 2015 and then 1% in August before edging up again to 1.25pc in November next year.

With strong differences in house prices across the UK, the extra amount of money people would find themselves paying by December 2015 under the "moderate" model of interest rate increases varied, from an extra £32 a month in London to people living in Wales and the North West projected to be paying an extra £15 a month. Across the income groups, high and middle income earners would see the percentage of their income that is taken up by their mortgage payments remain broadly constant, at 12pc and 20pc respectively if there is a moderate interest rise. But those in the lowest fifth of the income groups could see an increase in the chunk of their income that went towards mortgage payments, from around 54pc now to 55pc.

Some experts have suggested that people who are worried about the impact of interest rate rises on their mortgages could consider locking into a longer-term fixed rate deal. But others have suggested that with house prices strongly rising in some areas, some people may find that when a shorter-term deal comes to an end, the amount of equity they have in their home will have risen enough to push them into a higher deposit bracket, which could potentially give them access to a better range of deals and offset the impact of any gradual interest rate rises.

Andy Gray, Barclays' managing director of mortgages, said: "In working with the CEBR we have tried to model the realities that UK home owners may face in the very near future.

"In the face of a rise in mortgage rates and in the cost of living, it is vital for home owners to review their current situation."

Yesterday, the Financial Conduct Authority reminded lenders of their responsibility to identify borrowers most likely to struggle with rates rise and have processes in place to ensure they are treated fairly should they fall into arrears.

Here are the monthly payments that home owners could be faced with under a moderate increase in interest rates, according to the Barclays Mortgages/Cebr report, with the current monthly payments followed by those projected for December 2015 and the monthly increase in cash terms in brackets. It also includes a "drastic model", based on five rate rises, taking base rate to 1.75pc by next December:

mortgage_rate_rise_2834496a.png

The markets currently price in the first rate rise for the second quarter of next year, so between April and June. This forecast is volatile, and only a few weeks ago suggested the first move could come as early as January. Economists polled by Reuters earlier this month said they expect the first interest rate hike to come next year, with a majority pointing to either the second or third quarters. Some economists believe an increase is possible toward the end of this year.

This raised anxiety in itself can raise borrowing costs – on mortgages and even on the Government's own borrowing costs. This could threaten the nascent recovery. The Bank of England appears to have gone into overdrive to calm concerns. Today, the Bank's chief economist, Spencer Dale, attempted to reassure the public that interest rate rises are not likely to come this year, insisting that the Bank is not even thinking about higher rates. Speaking to BBC radio, he said rate rises will be "cautious" when they do come in order to "nurture the recovery".

He said: "We’re not planning to raise interest rates any time soon. Interest rates will have to rise at some point but not yet. And when they do they will rise very gradually and cautiously to make sure we continue to nurture the recovery we have seen in output growth and employment."

Almost simultaneously, David Miles, another member of the Monetary Policy Committee, was on BBC Breakfast and said: "We're not in a hurry to put up interest rates up. There's a lot of slack in the economy."

However, earlier this month, Mr Miles said investor expectations for a rate hike next year and for the base rate to reach 2pc by 2016 are "not unreasonable".

The Bank of England set out a new version of its "forward guidance" policy on February 12, linking its rate decisions to how quickly the economy uses up its spare capacity. It also signalled that interest rates will only rise gradually and even when the economy returns to normal are likely to be substantially below the 5pc common before the financial crisis.

Following that Bank Governor Mark Carney told the BBC's Andrew Marr Show that a very broad recovery would be needed to trigger rate rises. He said: "The path of interest rates is going to be calibrated very carefully to ensure ... that only when we see sustainable growth in jobs, in incomes and in spending will we make adjustments."

In contrast, Martin Weale, an external member of the Monetary Policy Committee (MPC), said earlier this week that the Bank could raise rates before next May's General Election.

Why? soddum, if the idiots decided to take out a mortgage they couldn't afford over a long term...I see that savers have been treated fairly over the last few years..

Edited by Dave Beans

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Interest rates will not rise as BOE tracks wage inflation and there is little chance of that happening.

I agree. They are doing everything in their power to maintain high house prices which are used as a catalyst to create more debt.

Raising interest raised would not help the economy.

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Interest rates will not rise as BOE tracks wage inflation and there is little chance of that happening.

For reference, see Japan.

The Japan scenario was a different (economic) time and a very different place? Anyway we don`t need rates up for HPC, the amount of jobs that are being shed will ensure it happens at some point in the near future. Already easily 50% off FTB prices here in Edinburgh I would say, more to come, especially once RBS starts really shredding jobs.

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I haven't read the article but averages in this case mean squat? Has the average outstanding mortgage amount been used or have the numbers been lessened using a "this much debt over this many dwellings regardless of mortgage"?

Large IO mortgages and a family with 5 years to run might make for a low average rise in payments but only one group has to hit trouble to affect local prices.

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The Japan scenario was a different (economic) time and a very different place? Anyway we don`t need rates up for HPC, the amount of jobs that are being shed will ensure it happens at some point in the near future. Already easily 50% off FTB prices here in Edinburgh I would say, more to come, especially once RBS starts really shredding jobs.

Even with ZIRP and QE Japan still enjoyed an almighty property crash. ;)

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Where am I going wrong here? Surely if interest rates rise by 1.25%, then somebody with a £100,000 mortgage will be paying an extra £1,250 a year?

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The Japan scenario was a different (economic) time and a very different place? Anyway we don`t need rates up for HPC, the amount of jobs that are being shed will ensure it happens at some point in the near future. Already easily 50% off FTB prices here in Edinburgh I would say, more to come, especially once RBS starts really shredding jobs.

Just out of interest, how are these falls being reported in local news north of the border? (if at all).

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We are a few years into this mess now, and there must come a point when sufficient people at one end of their mortgage life have paid it off, and sufficient FTB'ers are on-board paying punitive rates (one mentioned on this board recently for 8+% ?).

That leaves the mortgage holders in the middle - I can't believe many are MEW'ing any more, and so many of these have paid down their debt in the last few years.

There WILL be a tipping point when interest rates can rise safely and affect only minimal households.

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There WILL be a tipping point when interest rates can rise safely and affect only minimal households.

Interest rate rises will affect everyone. Think of all the people maxed out on credit cards, personal loans etc. All those small and medium sized businesses living from week to week and up to their eye balls in debt. Any interest rate rise will hack a knock on effect in the wider economy.

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Just out of interest, how are these falls being reported in local news north of the border? (if at all).

Not much at all. And when it does - always discussed in the past tense.

Regular reporting of Land Registry figures on local Bbc news , more or less halter as soon as they couldn't ******** the figures anymore.

Fyi - FTB prices down about 50% in real terms - bout 30% nominal.

Don't think i have ever heard this mentioned in the media at all.

Collective eyes closed and fingers in the ear . . .

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Interest rate rises will affect everyone. Think of all the people maxed out on credit cards, personal loans etc. All those small and medium sized businesses living from week to week and up to their eye balls in debt. Any interest rate rise will hack a knock on effect in the wider economy.

Shortish-term yes, that's the main we need to face to get out of the mess. Longer term if people stop spending on credit overall they'll have more money to spend as they won't be paying the banksters as much.

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I agree. They are doing everything in their power to maintain high house prices which are used as a catalyst to create more debt.

Raising interest raised would not help the economy.

clobbering the producers with endless red tape doesn't help the economy either, but they still do it.

...that's because it's not meant to help...it's a financial take-down.

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Not much at all. And when it does - always discussed in the past tense.

Regular reporting of Land Registry figures on local Bbc news , more or less halter as soon as they couldn't ******** the figures anymore.

Fyi - FTB prices down about 50% in real terms - bout 30% nominal.

Don't think i have ever heard this mentioned in the media at all.

Collective eyes closed and fingers in the ear . . .

Thanks for that. We hear nothing about it down here either - surprise, surprise.

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uk-base-rate-v-bank-svr.jpg

1 - the 1.75% rate would hardly be unthinkable or drastic based on past rates

2 - look at the SVR - banksters were very happy to slash away in 2009 when they feared the game was up - lending got very cheap very quickly for a while there- so they react fast to BOE base rate changes - didn't cut as far as the BOE though did they? hence...

3- banks look to have been making more money per pound lent* since the rates tanked, so, they have got some headroom to protect borrowers from actual rate risesif they choose to.

*by lent, of course I actually mean, created out of thin air and backed only by sentiment and consensus.

Edited by disenfranchised

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Where am I going wrong here? Surely if interest rates rise by 1.25%, then somebody with a £100,000 mortgage will be paying an extra £1,250 a year?

Only if it's interest only. With repayment mtgs the interest impact is less. They don't say what constitutes a 'typical' mortgage but I think the average is somewhere around £70k (wild guess).

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Only if it's interest only. With repayment mtgs the interest impact is less. They don't say what constitutes a 'typical' mortgage but I think the average is somewhere around £70k (wild guess).

If there's £100k outstanding, it doesn't matter if it's repayment or IO, the cost will go up by the same amount. Obviously on a repayment the % change will be lower.

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Where am I going wrong here? Surely if interest rates rise by 1.25%, then somebody with a £100,000 mortgage will be paying an extra £1,250 a year?

You're ignoring the compounding.

On a repayment mortgage, payments are set by finding the balance that means that the total capital to be repaid and the total interest on all the capital, as interest charges fall due, is extinguished by the repayments.

Think about the last pound that you pay off...

If you could magically pay it separately at the beginning of the term it would cost you £1 to pay it off.

If you pay it off at the end of a 25 year term when it was earning interest at 4% p.a. it costs you £2.71 to pay it off. If the interest rate was 5% it costs £3.48 to pay it off.

Imagine the same mess for the pound you pay off after 12 years etc. and you can see how the mathematics becomes a little more involved than naive expectation.

At each SVR change your monthly payment is adjusted so that the payments will amortise the capital and pay all the interest by the end of the term, on the assumption that the rate remains where it is until the end of the term.

For repayment mortgages, when compared to interest only mortgages with the same pcm repayment, the nominal principal is smaller so the 'volatility' of the cost of the future interest expenses as interest rates tweak is also smaller.

I'm sure that the mortgage brokers pointed this all out before fabricating the self-certified earnings so that the loan would happen and they'd earn commission. The alternative would be that people really didn't understand how mortgages worked and hence bid up prices to levels that they couldn't actually afford. And what are the chances of that? :ph34r:

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3- banks look to have been making more money per pound lent* since the rates tanked, so, they have got some headroom to protect borrowers from actual rate risesif they choose to.

"If they choose to" :lol:

Banks protect banks, (more precisely bank senior execs protect their sweet salaries and the whole institution falls into line, as institutions are inclined to do, natch).

Also the spread between the base rate and the SVR is not the same as the spread between the banks' cost of funding and the SVR. Recall that the spread opened before FLS was introduced and FLS was still introduced brazenly by the BoE as a way of ensuring that the banks were making enough of a spread on their lending to ensure that they were making profits that could be retained in order to reduce their leverage.

Sure the banks are ripping our faces off, but I doubt that our crap banks are really in a position to borrow over a 10 year horizon at the policy rate, and they've recently been reminded of the dangers of structuring their books on the basis that the cost of money today is a reliable indicator as to the cost of money tomorrow...

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"If they choose to" :lol:

Banks protect banks, (more precisely bank senior execs protect their sweet salaries and the whole institution falls into line, as institutions are inclined to do, natch).

I work in banking (a boring/needed bit around managing accounts and payments, I have nothing much to do with credit risk), so I won't disagree at all with your observation.

I certainly do not mean to imply they ever do anything out of any sense of moral or social obligation... All I mean is, if rates were, for example, up 3.5% to 4%, as things stand, they could hold their SVR back a fair bit to stop an IR rise biting as hard as it would if they merely tracked the base if they felt it was in their interests to do so because it helped to put a floor under a sustained price crash the same way base rate cuts did in 2009.

Also the spread between the base rate and the SVR is not the same as the spread between the banks' cost of funding and the SVR. Recall that the spread opened before FLS was introduced and FLS was still introduced brazenly by the BoE as a way of ensuring that the banks were making enough of a spread on their lending to ensure that they were making profits that could be retained in order to reduce their leverage.

My understanding was - banks started to shut off credit tap to protect their risk position, our economy depends on debt, government cannot bear to let the economy shrink as recession would up their own cost of borrowing, force them to make real austerity cuts, and therefore make them unpopular - so they FLS pump money into banks to ensure credit tap is still open...Households in the UK are pretty much the most indebted in the world now... to the UK banks... the banks can unwind their own indebtedness and rebuild capital reserves etc... but if their own debtors are still leveraged up to the hilt and canot absorb any shocks...is it enough?

Sure the banks are ripping our faces off, but I doubt that our crap banks are really in a position to borrow over a 10 year horizon at the policy rate, and they've recently been reminded of the dangers of structuring their books on the basis that the cost of money today is a reliable indicator as to the cost of money tomorrow...

When the government pumps the money in and offers to underwrite the first 20% of a mortgage, it's like giving a fat kid a box of chocolates? Some binging is inevitable? Basel III looming is like a wrapper stopping him getting to the next layer IMO, shame the government haven't done anything more, or earlier?

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Where am I going wrong here? Surely if interest rates rise by 1.25%, then somebody with a £100,000 mortgage will be paying an extra £1,250 a year?

As RK says, only if it's interest only. You can do an exercise; just use excel and use the formula - pmt(interest_rate, no_of_years, amount_of_mortgage). If you set the no_of_years to a big number, say 1000, then yes, payments increase by change in interest_rate * amount_of_mortgage. This is, in effect an interest only mortgage. If the payment term is shorter, say 25 years, the change in repayment is much less. (approximately GBP600 on a GBP100,000 loan for a 1% change in interest rates for anywhere in the range 0% to 4%.) My intuition is that with a typically small finite repayment period, for the purpose of computing the interest element of the periodic installment to pay, the initial interest element of each installment is being computed on only about half of the beginning balance on the loan. After all, you start off owing a lot, end up owing 0; on average, you owe half of a lot. (It's actually quite a bit more than half of a lot, but the principle holds.)

Edited by bearishonhouses

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Only if it's interest only. With repayment mtgs the interest impact is less. They don't say what constitutes a 'typical' mortgage but I think the average is somewhere around £70k (wild guess).

The money charity and previously credit action put average household secured debt at £48k BUT estimates typical average mortgage on mortgaged property at £114k.

CotB might have some better BoE/lenders figures on the subject.

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Where am I going wrong here? Surely if interest rates rise by 1.25%, then somebody with a £100,000 mortgage will be paying an extra £1,250 a year?

There's an app for that. The chart shows a £100k, 25 year repayment mortgage initially at 3% and costing £474 per month. After 5 years the rate rises to 4.75% and payments are £553 per month.

See in the chart and table how the capital repayment drops a little as the interest rises.

Edit: just adding the caveat that this is just an example and the repayment increase will depend upon the outstanding capital and remaining term.

_20140227_064739.JPG

_20140227_064801.JPG

post-5383-0-91463600-1393483915_thumb.jpg

post-5383-0-21130300-1393483930_thumb.jpg

Edited by 7 Year Itch

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The money charity and previously credit action put average household secured debt at £48k BUT estimates typical average mortgage on mortgaged property at £114k.

CotB might have some better BoE/lenders figures on the subject.

who cares about the whole market...BoE says the average NEW spend, which is where the PRICES are held up, is near £150,000.

And so serous is the position on defaulters, that SMI goes up to £200K, and even then, when it first came out, defaulters and bankers were bleating about how so many were not even covered by that!

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