Interest Rates At 15% Unthinkable?

[jpidding]

My father was speaking to a pensions advisor who is also a family friend last week. He has been in the business a while and recounted advising people on their investment strategies around 1990 when IR's were 15%. He said then that NOBODY ever ever factored into any scenarios the possibility of IR's EVER going to 5% (or below). Nobody even considered this a vague enough possibility to factor it into the equation.

We now have a similar situation where the population will not even consider rates rising to 8%, let alone 10, 12 or 15.

As has been regularly stated on this forum, the mantra is that "the government wont let it happen"

Just a small point, but worth a mention in these no-real-news times.

JP.

[The Masked Tulip]

And there is a whole generation of people - bearing in mind this a country where the vast majority of people do not know what interest it is they are paying on their credit cards - who have never seen IRs above 5% so they simply have no concept of what can happen.

I am still amazed by how so many huge inflationary factors - energy being the main one - has not yet resulted in a big rise in UK IRs. I can only assume that they are keeping IRs low in order to get Brown into No. 10?

If we get IRs at 7 or 8 percent then HPs in the UK will crash. Goodness knows what would happen if IRs reached 10 or higher percent?

[dog]

Its a whale swimming up the Thames. The idea seems quite silly and implausible until it happens.

[Tempest]

And there is a whole generation of people - bearing in mind this a country where the vast majority of people do not know what interest it is they are paying on their credit cards - who have never seen IRs above 5% so they simply have no concept of what can happen.

I am still amazed by how so many huge inflationary factors - energy being the main one - has not yet resulted in a big rise in UK IRs. I can only assume that they are keeping IRs low in order to get Brown into No. 10?

If we get IRs at 7 or 8 percent then HPs in the UK will crash. Goodness knows what would happen if IRs reached 10 or higher percent?

If the world trade game keeps up and China/India et all experience inflation of 8-12% for a good number of years their prices will up and we are at their mercy. I would happily bet right now that interest rates in my remaining working lifetime (25 yrs) will hit 10% + again (energy issues and the rise of the east's standard of living/power being two good reasons). Our inflation measures have been suppressed by the low price of imports. That will not last for ever.

[AteMoose]

a battle to keep IR low against higher hidden inflation, as everything accross the world starts to level out?

Edited January 23, 2006 by moosetea

[europbaron]

This is one of my big concerns as I'm facing a decision on whether to defer or transfer from what is otherwise an excellent final salary scheme. The problem it is index linked to inflation capped at 2.5%. Now who in their right mind believes inflation will not rise above that at any time during the next 30 years?

[Mushroom]

a battle to keep IR low against higher hidden inflation, as everything accross the world starts to level out?

Level out in which direction?

I don't know what the current figure what might be but I remember reading some 10 years ago about an American professor who was living on what would have then been the amount of money if all in the World had the same. It was then about $1500 per annum.

How in the West is the inflation in services going to be "hidden" for much longer?

[Randall Herbert]

This is one of my big concerns as I'm facing a decision on whether to defer or transfer from what is otherwise an excellent final salary scheme. The problem it is index linked to inflation capped at 2.5%. Now who in their right mind believes inflation will not rise above that at any time during the next 30 years?

Who in their right mind believes that inflation is anywhere near 2.5% in the UK at the moment?

[AteMoose]

level out, but not in monatary terms... so the amount i get paid is similar to that of somone in china or anyone else in the world and buys a similar amount of stuff. be that $1500 or $200,000, it doesnt matter, what matters is how much does $200,000 buy.....

[Mushroom]

level out, but not in monatary terms... so the amount i get paid is similar to that of somone in china or anyone else in the world and buys a similar amount of stuff. be that $1500 or $200,000, it doesnt matter, what matters is how much does $200,000 buy.....

So you mean "standard of living"?

I suppose it could be argued that might be a logical outcome of Globalisation. Equally it could be argued not, just the "winners" and "losers" change. That's the debate but, I think, in which direction is not yet clear.

[apom]

And there is a whole generation of people - bearing in mind this a country where the vast majority of people do not know what interest it is they are paying on their credit cards - who have never seen IRs above 5% so they simply have no concept of what can happen.

I am still amazed by how so many huge inflationary factors - energy being the main one - has not yet resulted in a big rise in UK IRs. I can only assume that they are keeping IRs low in order to get Brown into No. 10?

If we get IRs at 7 or 8 percent then HPs in the UK will crash. Goodness knows what would happen if IRs reached 10 or higher percent?

They are crashing at 4.5%.

The people going bankrupt are increasing..

It takes longer for debt you can't pay to cripple you.. if it is only a few hundred over what you can afford..

But trust me..

Far too many young people have £180,000 IR only mortgages on salaries less the £25,000 for them ever to survive long..

Credit cards grow to pay bills.. blah blah..

If you don't think a significant number of BTL investors who were waiting to flip... hanging out for Sipps.. are now in negative equity.. then think again..

New build flats are dropping by a lot.. £20,000 is an easy discount for a brand new one..

Try selling your first one.

People can't afford their debt.. 15% would cause a meltdown in weeks.. 4.5% is causing the same over a few months.

[DonnieDarker]

when IR's were 15%. He said then that NOBODY ever ever factored into any scenarios the possibility of IR's EVER going to 5% (or below). Nobody even considered this a vague enough possibility to factor it into the equation.

Erm. Sorry to piss on the bonfire but surely this is because anyone looking to protect their money looks at the worst-case scenario, not the best-case scenario.

Why would people get a mortgage when IRs were 15% think..."What if they drop to 5%?" They were probably more likely to factor in the possibility of rates climibing to 20%.

[sp1]

Erm. Sorry to piss on the bonfire but surely this is because anyone looking to protect their money looks at the worst-case scenario, not the best-case scenario.

Why would people get a mortgage when IRs were 15% think..."What if they drop to 5%?" They were probably more likely to factor in the possibility of rates climibing to 20%.

It shows that future expectation for most people is shaped by their recent experience more than other rational factors like fundamentals or seeing which way the big money players are useing thier weapons to further thier own interest.

[Unexpected]

Erm. Sorry to piss on the bonfire but surely this is because anyone looking to protect their money looks at the worst-case scenario, not the best-case scenario.

Why would people get a mortgage when IRs were 15% think..."What if they drop to 5%?" They were probably more likely to factor in the possibility of rates climibing to 20%.

You're thinking of buying soon aren't you DD? What worst case scenario are you factoring in if you dont mind me asking?

[wtc]

Erm. Sorry to piss on the bonfire but surely this is because anyone looking to protect their money looks at the worst-case scenario, not the best-case scenario.

Well apologies in advance for a possible "double bonfire piss TM" but low IR's ARE a worst case scenario for a lot of pension funds.

AFAIK, you are still required to buy an annuity with your pension fund and that annuity will be linked to the current IR. Not bad if IR's are 10%, total horse piss if they are below 5%.

Low IR's are good for homeowners, crap for pensioners and savers.

[DonnieDarker]

You're thinking of buying soon aren't you DD? What worst case scenario are you factoring in if you dont mind me asking?

To be honest I havent got to that level of commitment to the idea of buying yet.

Probably going to buy after February 2007 (wedding) when we can focus on it more. Will almost certainly buy sometime in 2007.

What would you recommend as worst-case scenario?

I was thinking 8%.

EDIT: I should add that I am quite a hard-saver so there is a buffer of cash there that could be directed towards any hike in mortgage repayements.

Rather than factoring in IR%s I have gone about my financial plans at this stage by saying I want to buy somewhere where the repayments on current rates would be equal to my outgoing in rent.

Currently my rent is £520 p month and I am able to save £5-700 a month depending on how good I am.

Edited January 23, 2006 by DonnieDarker

[The Masked Tulip]

Its a whale swimming up the Thames. The idea seems quite silly and implausible until it happens.

This is now the definitive answer to give to people who laugh at us and say that IRs will never rise again and that HPs will never crash.

[pyewackitt]

I went to dinner last friday for a friends birthday and whilst there i spoke to a friend of mine (an architect) about a flat i'm considering buying and told her I am trying to calcuate affording higher level IR's, in case of rises.

When I mentioned that I felt any property investment should be able to cover at least 6/7% IR rises she looked at me kinda funny - as if i was mad or had blasphemed in church...

Bear in mind we're both earning over national average and in our late twenties.... and my friend has a lovely large arty studio flat with a hefty size (about £150K) Interest only mortgage. Very few people I know have repayment mortgages... which i find more than a little silly.

I have to say this isn't the first time I've had this reaction... many of my friends in london have homes and mortgages and I doubt more than 1 or 2 could withstand IR going up above 10%....

I have to agree that most people my age weren't economically active in the last round of high interest rates and only those (like me i guess) who study economics and recent economic history will be aware of how benign our recent range of limited IR fluctuations has been to us.... and how vastly things could change with an IR hike of 2 or 3%.

[wtc]

I was thinking 8%.

Well I would offer that many many more ppl would have been burnt before the IR reached 8%. Whether you can take any comfort in that I don't know, but ultimately you can't cover every eventuality. As long as you aren't on the "margins" or anywhere close to them I'd say thats a good safety net.

[Tempest]

I went to dinner last friday for a friends birthday and whilst there i spoke to a friend of mine (an architect) about a flat i'm considering buying and told her I am trying to calcuate affording higher level IR's, in case of rises.

When I mentioned that I felt any property investment should be able to cover at least 6/7% IR rises she looked at me kinda funny - as if i was mad or had blasphemed in church...

Bear in mind we're both earning over national average and in our late twenties.... and my friend has a lovely large arty studio flat with a hefty size (about £150K) Interest only mortgage. Very few people I know have repayment mortgages... which i find more than a little silly.

I have to say this isn't the first time I've had this reaction... many of my friends in london have homes and mortgages and I doubt more than 1 or 2 could withstand IR going up above 10%....

I have to agree that most people my age weren't economically active in the last round of high interest rates and only those (like me i guess) who study economics and recent economic history will be aware of how benign our recent range of limited IR fluctuations has been to us.... and how vastly things could change with an IR hike of 2 or 3%.

Can I ask if (and where) there are stats for the proportion of IO and Repayment mortgages?

If there are any do historic figures exist?

[Pablo-silver or lead?]

You have to remember that interest rates were lowered, to artifficially low levels in the wake of the 911 terrorist attacks (base rates in the US reached 1%). This was to bolster confidence and keep the economy turning in its aftermath. They lowered them too far for too long. The real pain has only just started.

Pablo Silver or Lead?

[DTMark]

Another way of looking at this, is that it seems unthinkable that base rates could hit 15% now without massive reposession levels.

I don't recall the number, was it around "only" 70,000 reposessions a year around that time (1990 - 1993ish)?

Considering the difference in debt between then and now, it seems mad that IRs could hit 15% today and that reposessions (rising now with IRs at 4.5%) would "only" be 70,000 per year like the last time.

If base rates of 15% were serviceable in the early 90s (in most cases I guess they were hence "only" 70k reposessions), I wonder what base rate would produce the same effect as before - I believe it has been calculated on here to be about half that e.g. 7.5% - isn't that near to our long term average base rate?

So, perhaps we shouldn't be frightened of base rates hitting 15%, just returning to the long term average might be fairly horrendous for quite a number of people and I suspect "unthinkable".

[Guest Charlie The Tramp]

You have to remember that interest rates were lowered, to artifficially low levels in the wake of the 911 terrorist attacks (base rates in the US reached 1%). This was to bolster confidence and keep the economy turning in its aftermath. They lowered them too far for too long. The real pain has only just started.

Pablo Silver or Lead?

Yes that`s true. The average UK interest rate over the past 50 years is around 8% to 9%, so nothing is impossible. With the debt situation we now have even returning to a historical neutral of 6% will totally screw the debtors. Poor old Gordon and Mervyn know this, hence the walking on eggshells.

I don't recall the number, was it around "only" 70,000 reposessions a year around that time (1990 - 1993ish)?

I believe that was just one year, the total was around 250k, but I stand to be corrected.

[DonnieDarker]

Well I would offer that many many more ppl would have been burnt before the IR reached 8%. Whether you can take any comfort in that I don't know, but ultimately you can't cover every eventuality. As long as you aren't on the "margins" or anywhere close to them I'd say thats a good safety net.

I would never put myself in a position where I have no buffer or where I would consider the mortgage to be my only savings pot. I've learnt too much from people here to do that.

Just used a mortgage calculator to work out that I could that I could handle interest rates of 9.5%, although I'd be pretty skint.

At 12% I would be running on empty and having no holidays, meals out etc.

[The Masked Tulip]

In the 'old days' people used to max out on the mortgage knowing that whilst the first years would be painful financially that if they could get through them then inflation - not that people thought of it in these terms IMPO - would make the payments easier. In a sense the high inflation of the 1945 to late 1990s period meant that it was best to buy the most expensive house you could afford.

Sadly, people still think this way even though the mortgage 'game' has changed completely. People have no idea now that the low IRs mean that the debt is much much harder to erode away.