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BillyShears

Interest Rates And Affordability

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I've just been using the BBC's mortgage calculator to look at how interest rate changes will affect affordability.

Assume that a FTB is going to buy a house with a 130K mortgage paid back over 25 years. Assume that currently they can get a 5% mortgage (including fees etc). Their monthly repayments will be £768.65. Assume that mortgages get more expensive so that they can only get a 6% mortgage. To keep affordability the same, with a £768.65 mortgage payment every month, the price of the house has to fall. In order to keep the same payment, the price of the house has to be such that a £117,912 mortgage is required. This means that, assuming a 100% mortgage, the price of the house has to drop to 90.7% of it's previous value, a 9% drop in value. The bigger the deposit, the smaller the drop in percentage terms. Assuming that the deposit was 10% (13K) and has remained the same, then the value of the house would have to drop to 91.5% of its previous value.

Doing the figures for a rise to 8%, in order to maintain the same affordability, the size of the mortgage would have to shrink to £98,463. For a 100% mortgage, that mean that the house price would have to go down to 75.7% of its previous value, or with the 10% deposit, to 77.9% of its previous value.

So while if you view the increase in mortgage paid on a monthly basis, the difference doesn't seem that big, even a small interest rate change appears to affect affordability considerably.

Billy Shears

Edited by BillyShears

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Guest muttley

I've just been using the BBC's mortgage calculator to look at how interest rate changes will affect affordability.

Assume that a FTB is going to buy a house with a 130K mortgage paid back over 25 years. Assume that currently they can get a 5% mortgage (including fees etc). Their monthly repayments will be £768.65. Assume that mortgages get more expensive so that they can only get a 6% mortgage. To keep affordability the same, with a £768.65 mortgage payment every month, the price of the house has to fall. In order to keep the same payment, the price of the house has to be such that a £117,912 mortgage is required. This means that, assuming a 100% mortgage, the price of the house has to drop to 90.7% of it's previous value, a 9% drop in value. The bigger the deposit, the smaller the drop in percentage terms. Assuming that the deposit was 10% (13K) and has remained the same, then the value of the house would have to drop to 91.5% of its previous value.

So while if you view the increase in mortgage paid on a monthly basis, the difference doesn't seem that big, even a small interest rate change appears to affect affordability considerably.

Billy Shears

There are other factors at play though. Once interest rates start to rise people fear for their jobs and start to spend less and save more. After all, the increase in IRs makes saving more attractive. The decrease in spending causes unemployment, and people fear for their jobs and spend less and save more. This is how economies go into recession.

It's the opposite of what happens when IRs fall.

That £768.65 monthly repayment will suddenly look enormous to someone who has just lost their job, or fears that they may lose their job.

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There are other factors at play though. Once interest rates start to rise people fear for their jobs and start to spend less and save more. After all, the increase in IRs makes saving more attractive. The decrease in spending causes unemployment, and people fear for their jobs and spend less and save more. This is how economies go into recession.

It's the opposite of what happens when IRs fall.

That £768.65 monthly repayment will suddenly look enormous to someone who has just lost their job, or fears that they may lose their job.

Agreed. But I was just trying to look at the effect of affordability in isolation. If prices drop due to interest rates alone, then that will change sentiment in a wide range of ways, some of which you describe, which would then have bigger effects.

Billy Shears

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Hi BillyShears

Thanks for taking the time to make this post. It’s very interesting to see how things should in theory affect the average guy. Actually your post makes it very easy for people here to see straight away the consequence of rising interest rates.

Lets just hope they keep rising ! ;)

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Unaffordability table for IO mortgages

mortgage

Interest rate mortgage at income multiple

to maintain affordability

11.25% 3.5x

7.75% 5x

6.5% 6x

5.5% 7x

5% 8x

so, when mortgage rate is 5% it is possible to maintain a 8x mortgage, but where mortgage interest rate is 11.25% a maximum mortgage multiple of 3.5x (traditional) is necessary.

Remember these are for IO mortgages

I think when mortgage interest rates are around 6.5%, which I believe will occur late next year, there will be an affordability crisis en mass, as I believe there is a large number or 6x mortgage multiples out there.

Good thread

Edited by Flat Bear

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I've just been using the BBC's mortgage calculator to look at how interest rate changes will affect affordability.

Assume that a FTB is going to buy a house with a 130K mortgage paid back over 25 years. Assume that currently they can get a 5% mortgage (including fees etc). Their monthly repayments will be £768.65. Assume that mortgages get more expensive so that they can only get a 6% mortgage. To keep affordability the same, with a £768.65 mortgage payment every month, the price of the house has to fall. In order to keep the same payment, the price of the house has to be such that a £117,912 mortgage is required. This means that, assuming a 100% mortgage, the price of the house has to drop to 90.7% of it's previous value, a 9% drop in value. The bigger the deposit, the smaller the drop in percentage terms. Assuming that the deposit was 10% (13K) and has remained the same, then the value of the house would have to drop to 91.5% of its previous value.

Doing the figures for a rise to 8%, in order to maintain the same affordability, the size of the mortgage would have to shrink to £98,463. For a 100% mortgage, that mean that the house price would have to go down to 75.7% of its previous value, or with the 10% deposit, to 77.9% of its previous value.

So while if you view the increase in mortgage paid on a monthly basis, the difference doesn't seem that big, even a small interest rate change appears to affect affordability considerably.

Billy Shears

Mmm, so a 1% rise in mortgage rates gets a 9% drop in house prices..... so the 0.25% rise that the markets are talking about (but not the MPC), will on this basis gives us ..... about 2% decrease in house prices. Yep thats your crash then !

As the more rational ones have been saying on here for a long while, there will be no crash becuase IRs are just not going to rise enough to create a crash.

Welcome to the rational club, Billy Shears. It may have been a long journey of discovery, but you have finally arrived to the correct answer.

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Guest muttley

Mmm, so a 1% rise in mortgage rates gets a 9% drop in house prices..... so the 0.25% rise that the markets are talking about (but not the MPC), will on this basis gives us ..... about 2% decrease in house prices. Yep thats your crash then !

As the more rational ones have been saying on here for a long while, there will be no crash becuase IRs are just not going to rise enough to create a crash.

Welcome to the rational club, Billy Shears. It may have been a long journey of discovery, but you have finally arrived to the correct answer.

I refer you to my earlier reply.

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N early 1m people in this country are on the verge of bankrupcy. A 0.25% rise is all it takes. Remember last year? Only by ddropping rates by 0.25 did the market stop falling...

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Mmm, so a 1% rise in mortgage rates gets a 9% drop in house prices..... so the 0.25% rise that the markets are talking about (but not the MPC), will on this basis gives us ..... about 2% decrease in house prices. Yep thats your crash then !

As the more rational ones have been saying on here for a long while, there will be no crash becuase IRs are just not going to rise enough to create a crash.

Welcome to the rational club, Billy Shears. It may have been a long journey of discovery, but you have finally arrived to the correct answer.

ImupNorth

You are only taking one factor on board in your assumption - as Muttley said there are many more

Billy deliberately restricted his caluclation to figures - what you can't calculate is sentiment

If you know anything about psychology you will know about the herding instinct - it is this that has kept HPI alive - people being fearful of not being able to afford a property so they will buy at all costs

The middle ground is denial - where you are at the moment - you know in your heart of hearts that property for most is unaffordable in the long term - but you can't admit it (you may be in control but many others are not

The other side of denial is fear again - this time fear of not being able to sell and being left with less equity or more negative equity in the case of all who have bought in the last 12 months

When the fear gets too great panic starts to set in - need I explain more?

I hope you have done your sums correctly

CS

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ImupNorth

You are only taking one factor on board in your assumption - as Muttley said there are many more

Billy deliberately restricted his caluclation to figures - what you can't calculate is sentiment

If you know anything about psychology you will know about the herding instinct - it is this that has kept HPI alive

Agreed. I've always believed that it will take a death of a thousand cuts to deflate the housing bubble, rather than a single *****. Reduced affordability for new entrants will be one such cut, though a comparatively deep one. But the main factor will be sentiment. Someone once likened sentiment to an ocean liner. Even when you've got the motors in full reverse, it takes a long time for the boat to slow down, and actually start moving in the other direction.

Billy Shears

Edited by BillyShears

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Worst case scenario and rates do tend to go upward a lot people will simply go for long fixed mortgages.

Will those mortgages cost the same as long fixed mortgages nowdays?

Billy Shears

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Guest muttley

Worst case scenario and rates do tend to go upward a lot people will simply go for long fixed mortgages.

Don't forget to factor in rising unemployment and falling rents.

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Long rates will be on the up too.

And the fees associated with moving your mortgage will also have to be met.

I agree that IRs are just one small factor that will cause the HPC.

I don't think we need some huge trigger for an HPC, its starting to fall under its own weight. A slow change in sentiment is already happening.

Anything extra, like IR increases, increased bankruptcy, increased repossessions, increased unemployment, sotck market falls (longer term than 2 weeks admittedly), company liquidations, increase in cost of living (bills & taxes rising) etc etc will just add to the negative sentiment.

I think the market is mainly sentiment driven. As many bulls have identified, the crash will most likely only have a catastrophic effect on a small proportion of the market. But if all of these negative things happen (and most of them are underway or getting started) it will dent confidence, not just in the economy but in the housing market.

Sentiment will see to it that people will just not be willing to pay over the odds for their living costs. I suspect people will be more interested in saving some money to protect themselves against unemployment etc, rather than taking on massive debts for a home that will likely fall in value.

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I suspect people will be more interested in saving some money to protect themselves against unemployment etc, rather than taking on massive debts for a home that will likely fall in value.

That's right - in the last crash the savings ratio increased significantly and people just didn't want to spend money or spend anywhere near the same % of their income on their mortgages.

I don't think it's about a simple trade off between interest rates and house prices. It's also massively about how much the banks will tighten.

When the exit starts en-masse from the property market, and investors lose all interest, the only people at the bottom of the chain will be FTBers, and they will only be able to pay what they can really afford. And iif the banks tighten as well, then house prices would need to fall in real terms by 50%.

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I don't think it's about a simple trade off between interest rates and house prices. It's also massively about how much the banks will tighten.

Who does think it's a simple trade-off? I doubt even ImUpNorth believes that.

Billy Shears

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As long as the lenders lend, the muppets will borrow. The interest only mortgage was a master stroke on their part, allowing the gullable to borrow astronomical amounts, and still make the monthly payments, whilst the lender creams off the profit into the forseeable future.

Here's a prediction. It is just a matter of time now before one of the more creative lenders offers a 'Low start interest only mortgage'. It will load the interest repayments towards the end of the term, thereby increasing affordability at the start, allowing even more monsterous amounts to be lent. It will be dressed up as a measure to help first-time buyers 'get on the ladder'.

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Who does think it's a simple trade-off? I doubt even ImUpNorth believes that.

Billy Shears

Yep, its not as simple as most on here would like to think, hence thats why the bears can't explain why the market just won't drop. Thats why the 'professional' STRers like Dr Bubb can't explain it either.

The key factor is just how much money people have at their disposal - take the money away and prices will drop.

If IRs were to rise to 8% - then you can sure as better wage inflation would probably be about the same

aswell and CPI at about 6%. Now thats unlikely, but all it means is that wages are going up and making it easier to repay that mortgage in real terms. Also, house prices may be going up aswell.

The complicated bit is understanding where people get their money from and the influences on them for spending it. No one thing controls this, political situation, employment, time of life, kids, taxation, interest rates, investments, inheritance - all sorts of things interact here. Then you've got fashion, immigration, greed, sentiment and lots of other things which affect the housing market as well.

When you sit down and consider all these things and put them in the mixer, then look out of the window at the bustling, growing economy, with lots of people earning and investing good money .... does it really look like a crash scenario ? Nope, it don't.

A property crash may well occur one day, but it sure isn't on the horizon at the moment. The best you can hope for is stagnation.

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Yep, its not as simple as most on here would like to think, hence thats why the bears can't explain why the market just won't drop. Thats why the 'professional' STRers like Dr Bubb can't explain it either.

The key factor is just how much money people have at their disposal - take the money away and prices will drop.

If IRs were to rise to 8% - then you can sure as better wage inflation would probably be about the same

aswell and CPI at about 6%. Now thats unlikely, but all it means is that wages are going up and making it easier to repay that mortgage in real terms. Also, house prices may be going up aswell.

The complicated bit is understanding where people get their money from and the influences on them for spending it. No one thing controls this, political situation, employment, time of life, kids, taxation, interest rates, investments, inheritance - all sorts of things interact here. Then you've got fashion, immigration, greed, sentiment and lots of other things which affect the housing market as well.

When you sit down and consider all these things and put them in the mixer, then look out of the window at the bustling, growing economy, with lots of people earning and investing good money .... does it really look like a crash scenario ? Nope, it don't.

A property crash may well occur one day, but it sure isn't on the horizon at the moment. The best you can hope for is stagnation.

Damn your a muppet.

So when Inflation is low (low IR's) people will borrow loads because of chepa borrowing costs

And when IR's are high, people will borrow more because their wges are going up

You silly fool :lol::lol::lol:

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Here's a prediction. It is just a matter of time now before one of the more creative lenders offers a 'Low start interest only mortgage'. It will load the interest repayments towards the end of the term, thereby increasing affordability at the start, allowing even more monsterous amounts to be lent. It will be dressed up as a measure to help first-time buyers 'get on the ladder'.

I've also been thinking about that. The problem is the bank would be loosing money in the short term, so I hope it won't happen. ;)

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...... then look out of the window at the bustling, growing economy, with lots of people earning and investing good money .... does it really look like a crash scenario ? Nope, it don't.

Bustling economy - what planet are you on?

Recent reports on the very optimistic BBC

Retail sales and profits down

Builders sales & profits down

House sales down - prices to follow

DIY sales and profits down

New car sales down

Even VAT collected is down

etc.etc.

The reason why

Petrol up )

Gas up )

Electricity up ) people have no choice but to pay for these items

Water Up )

Council Tax up )

Food up )

The only reason why the economy was "a miracle" as Gordon Brown stated was he stole huge amounts off us in stealth taxes and spent it insidcriminataly creating jobs and "supposed wealth" - his second plan was to convince homeowners to borrow and spend (easy to pander to greed) they did just so

But now Gordon has no more money and neither do many of the people who believed in his miracle economy even Gordon Brown knows he's stuffed

Keep dreaming

CS

Edited by Cornwall Sceptic

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Yep, its not as simple as most on here would like to think, hence thats why the bears can't explain why the market just won't drop.

Straw man argument. No-one is claiming that it is simple. You were the only one on this thread that wrote anything even vaguely approximating a claim that affordability changes due to interest rate rises would be what determines price.

I've also been thinking about that. The problem is the bank would be loosing money in the short term, so I hope it won't happen. ;)

Negative amortisation (they call them negative amortization) loans are already in use in the US. Here's a critical article on them:

http://www.bankrate.com/brm/news/DrDon/20031021a1.asp

I would guess that we have considerable amounts of negative amortization loans by stealth in this country. People who have an IO loan but no repayment vehicle or an inadequate one, will end up paying much more in later years in exchange for lower (or no) repayments now. And that's only the people who will pay off their houses.

Damn you're a muppet.

So when Inflation is low (low IR's) people will borrow loads because of cheap borrowing costs

And when IRs are high, people will borrow more because their wages are going up

You silly fool :lol::lol::lol:

He's completely missed the point about sudden jumps in inflation. Let's say inflation rockets, and interest rates go up to 10%. That means that those on variable rate mortgages will have their interest payments double. But their wages and disposable income doesn't double immediately. Assuming that wages also increase by 10% a year, it will take four and a half years or so for their wages to double. What will happen in the meantime?

Let's say that interest on a mortgage goes up from 5% to 6%. The interest rate has risen by 20%, so the interest part of mortgage payments will also have risen by 20%. Now, does anyone seriously believe that wages or in particular disposable income will go up by 20% in a year when interest rates only go up a single percent from 4.5 to say 5.5%?

Billy Shears

Edited by BillyShears

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I've also been thinking about that. The problem is the bank would be loosing money in the short term, so I hope it won't happen. ;)

I wonder.... You're right, the lender would be vulnerable in the short term, but if they could target this type of mortgage at say, young couples with a steady income, they may be able to make it pay. Lets hope not.

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Let's say that interest on a mortgage goes up from 5% to 6%. The interest rate has risen by 20%, so the interest part of mortgage payments will also have risen by 20%. Now, does anyone seriously believe that wages or in particular disposable income will go up by 20% in a year when interest rates only go up a single percent from 4.5 to say 5.5%?

Billy Shears

I think you've oversimplified things here Billy.

Wages DON'T have to go up 20% to match a 20% rise in mortgage rates for two obvious reasons.

1/ The % of your salary spent on mortgage payments is typically only 30%. (for most homeowners it is much less) So the increase in salary to offset the higher rate will only be a small fraction of 20%.

2/ Most mortgages are repayment and this means the increase in mortgage repayments will not actually rise 20% with a 20% increase in rates. This decreases the fraction still further.

Don't forget that wages are rising at 4% yoy and they will go up even faster if inflation kicks in.

If rates take >2 years to go up by 1% then the impact will not be that severe to existing homeowners IMO.

The housing market would be stopped dead though...

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I think you've oversimplified things here Billy.

Wages DON'T have to go up 20% to match a 20% rise in mortgage rates for two obvious reasons.

1/ The % of your salary spent on mortgage payments is typically only 30%. (for most homeowners it is much less) So the increase in salary to offset the higher rate will only be a small fraction of 20%.

2/ Most mortgages are repayment and this means the increase in mortgage repayments will not actually rise 20% with a 20% increase in rates. This decreases the fraction still further.

Don't forget that wages are rising at 4% yoy and they will go up even faster if inflation kicks in.

If rates take >2 years to go up by 1% then the impact will not be that severe to existing homeowners IMO.

The housing market would be stopped dead though...

I was specifically talking about people at the limits of affordability in a high inflation environment. Unless everything else stays the same price, which doesn't happen in a high inflation environment, then more money will need to come from somewhere.

Billy Shears

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  • 301 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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