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Si1

Why Are Mortgages So Staggeringly Cheap Right Now?

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Putting speculation aside that bank's risk costs will shoot them up in future, WHY are they so staggeringly cheap?

Edited by Si1

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Because they're trying to get more people to buy into the ponzi and it's like trying to milk a bull.....

Edit clarity

Who's "they"?

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It could be that sterling is seen as a safe haven, and banks have nowhere else to put the money they raise thru bonds, other than mortgages

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I think the better question is why were they so high in the past. I welcome lower yield the rich just getting richer just sitting on their a*** is wrong in my books.

I know someone will say that the rich have got richer because of asset price inflation. However they have to sell their assets to get an income stream.

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I think the better question is why were they so high in the past. I welcome lower yield the rich just getting richer just sitting on their a*** is wrong in my books.

I know someone will say that the rich have got richer because of asset price inflation. However they have to sell their assets to get an income stream.

because those assets generate cashflow.. ? Cash generates interest, stocks generate dividends, property generates rent

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I think the better question is why were they so high in the past. I welcome lower yield the rich just getting richer just sitting on their a*** is wrong in my books.

I know someone will say that the rich have got richer because of asset price inflation. However they have to sell their assets to get an income stream.

hmm, that money you say is from the rich is mostly from your pension funds, your savings.

Financial "instruments" are bought and sold to pay the proles out.

There are so many of them that there actually are few buyers these days, without central banks buying them themselves at a falsely inflated price....Whats left ends up in the lending market, with, tiny costs, as actually few want them. Supply and demand....huge supply, little demand = low price.

The idea of QE is to reduce the quantity of instruments out there, and increase the cash around to keep money moving. At some stage the only buyers will be the money men as ultimately, there will be so much cash that it will become worthless.

Your mortgage will ultimately be so cheap, the effort of drawing up a contract will simply be not worth the bother.

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because those assets generate cashflow.. ? Cash generates interest, stocks generate dividends, property generates rent

Cash doesn't generate interest

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Correlation with government bond yields. Mortgages are a riskier investment. Flight to safety means lower demand.

Which should push mortgage backed bonds IRs UP NOT DOWN

Edited by Si1

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because those assets generate cashflow.. ? Cash generates interest, stocks generate dividends, property generates rent

Yes but the yield is going down. If you were to offer me an asset for £1000 with a yield of 1% I think I would blow the £1000 on a holiday instead. I think there is a limit to how high asset prices can rise in relation to their yield.

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Putting speculation aside that bank's risk costs will shoot them up in future, WHY are they so staggeringly cheap?

The way I understand it is that a fixed-rate mortgage will price off the corresponding gilt, so the first part of your answer is because the yield on gilts is staggeringly low. The second part would be the fact that the original inclusion of residential mortgage lending in the Funding For Lending scheme, though now ended, has not yet worked its way out of the system, i.e. the banks are still lending on deals which have been costed on the basis that any borrowing needed to fund them can be facilitated with an FLS collateral swap - the bank will, for a small fee, be borrowing at essentially the same rates the government has to pay when it borrows, which is presently bugger all.

I think the final joker would be that in many cases the very low interest rate looks like it may be a loss leader. What makes the money is the fee, which can be capitalised by the borrower into the mortgage and thus will be ignored by some borrowers. In many of these cases, particularly the 2-year fixes, once the fee is included in the assessment of the total cost of borrowing the deals don't look as brilliant as they do on the headline rate.

As the heart of the answer is gilt yields, the answer begs the question, why are gilt yields so low? And the biggest part of the answer to that would have to be the enormous amount of new base money created by the central banks and used to buy bonds. Low mortgage rates are an intended consequence of the methods central bankers have chosen in order to enable us to live with these levels of public and private debt, given the ability of fiscal authorities (i.e. the Treasury) and private households to actually service them.

If you wanted to depress yourself you could re-imagine all the moves towards prudent lending (e.g. the Mortgage Market Review) not as a recognition of the failure of the banks to lend responsibly in the past, but actually as an attempt to offset the magnitude of the unsustainable re-inflation of the housing bubble which would be expected to follow from these cheap money policies. As I've argued before, if the Bank of England attends to its financial stability goals then it can't continue to overburden private households with ludicrous mortgage debt as that is in an of itself a significant threat to financial stability, (see Mian and Sufi, House of Debt, for a compelling attempt to make that argument stick). The humble mortgage is ground zero for this mess - house prices are just tagging along for the ride!

Edited by bland unsight

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Regarding my previous post, oops, they price off swap rates not gilt rates; though the two are hardly strangers, H/T northshore.

Yeah but oops here too as I didn't read it before posting. Up to date rates: http://markets.ft.com/RESEARCH/markets/DataArchiveFetchReport?Category=BR&Type=ICAP&Date=11/21/2014

(from Data Archive, bottom of page here: http://markets.ft.com/research/markets/overview)

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You have to qualify for these mortgages. Credit credit everywhere, and not a pound to borrow. Those who can qualify, tending to be fair-to-strong bets for the banks to squeeze in the future.

£1m Euro Raffle winner was recently turned down for mortgage, and thwarted his plan of getting into BTL. Although he seems to be playing it safer with no lavish superhouse cash-purchase of his own home - hopefully smartly staying in cash.

£1m lottery winner's credit rating so poor he cannot get a mortgage

21 Nov 2014

[..] “I was going to buy a load of houses with mortgages and then get people in to rent them to pay for the mortgage,” he said. “But mortgage lenders don’t see the interest of an investment as income so, in effect I am a millionaire, but I can’t even get a mortgage.” He is now buying outright a £150,000 house in Hereford.

http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/11246040/1m-lottery-winners-credit-rating-so-poor-he-cannot-get-a-mortgage.html

November 6, 2014 - buyers who qualify and who want to borrow to meet these prices.. a bit like this, mad, but they have known themselves to be rewarded by equity / bailouts regardless... 'too few houses.. demand demand' and overseas money never runs out ?

Alex061114_3097183k.jpg

On the remortgaging side of new deals at lower rates, so banks can more rapidly improve their positions?

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They're fighting each other to lend out free money with no risk. The more they pile on the more money they make.

If things start to go tits up then they'll have to be another bail out or government intervention as the entire house of cards will fall down without it, the banks know the government won't let this happen and will have to step in.

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They're fighting each other to lend out free money with no risk. The more they pile on the more money they make.

If things start to go tits up then they'll have to be another bail out or government intervention as the entire house of cards will fall down without it, the banks know the government won't let this happen and will have to step in.

I have trouble getting my head round swaps, and all the rest of the Derivatives...What I do know is that someone else is making money doing these things...

I think you are right though, they again have eliminated risks, with Swaps, and are confident that whoever is left holding the baby and cant pay out, is going to be bailed.

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