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werewolves

Exploding The Fixed Rates Myth

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Hello everybody. I hope you are all keeping well. Time for a more serious post. Forgive the humour but I haven't been taking my medication.

Certain things irritate me. Such a scratchy T shirts, flat remote control batteries and squeaks in the car when I'm driving. But on a different league is the fallacy of fixed rates. The saviour of all those who are mortgaged up to their eyeballs. I know numerous bulls who actually believe they will be relatively unaffected by an potential house price crash because they will fix rates.

The typical line of reasoning I often see is:

Q: Dear Mr Bull, what will you do if interest rates go up? How will you fund your 200 BTL properties?

A: I will fix rates of course!! Then I will be free of any additional financial burden due to rate rises and I can continue to mint money. You dumbass bears don't know anything, do you? Now I'm off to spend my money on frilly knickers, even though I am a man.

Q: I'm not comfortable with the frilly knicker thing, and could you please take your hand off my knee.

The idea sounds simple, but then again it's probably a load of boll ocks. Fixing rates is only going to have a limited impact. Here's why:

The UK housing market is associated with 1.1 trillion pounds of debt. £1 100 000 000 000.

Current UK repo rate is 4.5% at present. For whatever reason (Bush nukes Iran?) say the rate climbs to say a modest 7% in the next 5 years.

The bull argument would see people fixing rates when they got twitchy, say at 5%. You see bulls are smart, they know in advance when rates are going up and can outsmart banks. They have special financial sensors in their horns and they derive great powers of divination from their huge buttocks.

The banks are then left with a minor 2% deficit on their books. Yes that works out to:

£ 2 2 0 0 0 0 0 0 0 0 0

That's 22 billion pounds the banks would lose per annum. Something I assure you will not happen.

This ideal bull scenario is unlikely to happen in the first place:

- Banks tend to outsmart people, not the other way around.

- Fixed deals are going to dry up pretty sharply if things get tough.

- Fixed deals generally don't last forever. Your gonna have to cough up when it runs out.

- Most people won't see it coming and will have missed the chance to fix rates to any sensible level. They never did the last time.

- If the housing market collapses, chances are rental income will plummet. Your not gonna have the dough to cover your payments.

- The last HPC was followed by a recession. Same this time.

- The list goes on and on... The apocalyptic scenario has been debated numerous times before.

All those bulls out there counting on fixed rates to save their bacon (or whatever the bull equivalent is) are in a state of denial. They won't save you, nor will they save the housing market. If repo rates rise then your gonna have to face the music.

:huh:

P.S. Before anybody pops a cap in my ass about the 7% interest rate scenario, can you promise my unequivocally that interest rates will not rise for the next 25 years?

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I have to take issue with your post :D

Fixed Rates will save someone, but they obviously have to have one.

Banks when they give you a fixed rate, have also borrowed the money on a fixed rate so they will not have a problem.

Fixed rates are going to make a big difference, and with regard to the last recession, fixed rates were not available wholesale. Only a few people had a fixed rate, Charlie being one of them (Lucky Bstrd!!).

If I could have got one, I can assure you I dam well would have got one. Most people could see what was coming, but it happened so quick, (under 2 months) that nobody could do anything about it.

So this time for sure is very very different...................with a caveat.

The people I speak to start the conversation saying "Yes I too was worried, so we have a fixed rate mortgage now" I ask how long "2 years comes the reply" I then have to run off in laughter, to change my trousers, the pee running down my leg as I go.

Fixing a rate for 2 years is pathetic, not even an attempt, and completely and utterly useless.

A recession if you think such a thing exists, lasts for the best part of 10years!!.

However if you are a subscriber to the concept of a miracle economy, then dont waste your money fixing the interest rate on your mortgage, there is a premium to pay. Save that money, and spend it on legal fees when you default on the mortage.

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I agree, and most will not see it coming, and if they did they would refuse to beleive it. Look at sentiment a month ago when the markets were predicting hikes - the media were still talking about cuts, and so the masses didn't worry. How many have fixed their rate in the last month? Probably not many as variable rates are currently cheaper.

Also, if rates went up the banks won't necessarily lose money. The debt will be sold to the money markets.

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All those bulls out there counting on fixed rates to save their bacon (or whatever the bull equivalent is)

Ummm. That'll be beef then? :P

I think you make a good point, but to a degree I do think that it will come down to whether BTLs go for fixed rates early enough. I suspect not, as many are already on IO tracker BTL mortgages... are there many fixed rate BTL products on the market??

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A chum of mine got himself a fixed rate last week. In the week between him getting the details and going to the bank to sign the form, the low rate he was going for was withdrawn, forcing him to go for a higher rate. The banks seem to be anticipating a rough ride ahead.

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A chum of mine got himself a fixed rate last week. In the week between him getting the details and going to the bank to sign the form, the low rate he was going for was withdrawn, forcing him to go for a higher rate. The banks seem to be anticipating a rough ride ahead.

Exactly. The markets have been driving IR's up for sometime now. Guess which product seems to be carrying the main impact, according to the press I have read, that's right Fixed Rate. The banks, as is often the case, are ahead of the game.

Am I right in saying some lenders have, briefly, suspended Fixed Rates products?

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There's no "myth" about fixed rates. They are a choice of mortgage product, and like all others, they carry risks and benefits.

I've just taken out a 5 year fixed rate to replace the previous 2 year fixed rate deal we had. If rates remain stable or even go down then I'll have lost money but I accept that risk. The big plus point is that I know exactly how much I'll be paying for the next 5 years, and can budget accordingly. What we hate when it comes to finances is unpredictability. Fixed rates give you peace of mind.

Almost everyone I know is on a fixed rate deal these days, with 5 and 10 year deals much more widespread than previously, particularly among new buyers and people who would have most to lose with a sudden hike in IR. The people I know who don't bother with them are those who've been paying a mortgage for years, where the payments are too small to worry about, even if IRs did shoot up. This is one of the real "myths" for the HPC bears to chew over.

That said, I don't think BTLers will be safe. As far as I know, most lenders don't like to offer special mortgage deals to BTL customers. They tend to pay standard rates and would be vulnerable if there was a bad crash.

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Almost everyone I know is on a fixed rate deal these days, with 5 and 10 year deals much more widespread than previously, particularly among new buyers and people who would have most to lose with a sudden hike in IR.

you must hang about with a very odd crowd then. But that's hardly surprising. :P

All those bulls out there counting on fixed rates to save their bacon (or whatever the bull equivalent is) are in a state of denial. They won't save you, nor will they save the housing market. If repo rates rise then your gonna have to face the music.

quite right - you only have to listen to many of the bulls on here who steadfastly refuse to acknowledge that rates can/will go up.

Never mind all my FTB peers who can only just scrape a variable (being the cheaper option) and are therefore exposed to changes at any stage of the next 25-40 years :blink:

Edited by Fancypants

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Hello everybody. I hope you are all keeping well. Time for a more serious post. Forgive the humour but I haven't been taking my medication.

Certain things irritate me. Such a scratchy T shirts, flat remote control batteries and squeaks in the car when I'm driving. But on a different league is the fallacy of fixed rates. The saviour of all those who are mortgaged up to their eyeballs. I know numerous bulls who actually believe they will be relatively unaffected by an potential house price crash because they will fix rates.

The typical line of reasoning I often see is:

Q: Dear Mr Bull, what will you do if interest rates go up? How will you fund your 200 BTL properties?

A: I will fix rates of course!! Then I will be free of any additional financial burden due to rate rises and I can continue to mint money. You dumbass bears don't know anything, do you? Now I'm off to spend my money on frilly knickers, even though I am a man.

Q: I'm not comfortable with the frilly knicker thing, and could you please take your hand off my knee.

The idea sounds simple, but then again it's probably a load of boll ocks. Fixing rates is only going to have a limited impact. Here's why:

The UK housing market is associated with 1.1 trillion pounds of debt. £1 100 000 000 000.

Current UK repo rate is 4.5% at present. For whatever reason (Bush nukes Iran?) say the rate climbs to say a modest 7% in the next 5 years.

The bull argument would see people fixing rates when they got twitchy, say at 5%. You see bulls are smart, they know in advance when rates are going up and can outsmart banks. They have special financial sensors in their horns and they derive great powers of divination from their huge buttocks.

The banks are then left with a minor 2% deficit on their books. Yes that works out to:

£ 2 2 0 0 0 0 0 0 0 0 0

That's 22 billion pounds the banks would lose per annum. Something I assure you will not happen.

This ideal bull scenario is unlikely to happen in the first place:

- Banks tend to outsmart people, not the other way around.

- Fixed deals are going to dry up pretty sharply if things get tough.

- Fixed deals generally don't last forever. Your gonna have to cough up when it runs out.

- Most people won't see it coming and will have missed the chance to fix rates to any sensible level. They never did the last time.

- If the housing market collapses, chances are rental income will plummet. Your not gonna have the dough to cover your payments.

- The last HPC was followed by a recession. Same this time.

- The list goes on and on... The apocalyptic scenario has been debated numerous times before.

All those bulls out there counting on fixed rates to save their bacon (or whatever the bull equivalent is) are in a state of denial. They won't save you, nor will they save the housing market. If repo rates rise then your gonna have to face the music.

:huh:

P.S. Before anybody pops a cap in my ass about the 7% interest rate scenario, can you promise my unequivocally that interest rates will not rise for the next 25 years?

Hi Werewolves

FWIW about at present about 70% of people go for fixed rates, therefore I can't see why you don't think people can't get fixed rates. THe banks put a premium on the product, if interest rates fall they make money if the rise more than expected they lose money. Or in fact the people they sell the debt to do.

P.S. Before anybody pops a cap in my ass about the 7% interest rate scenario, can you promise my unequivocally that interest rates will not rise for the next 25 years?

If you fix for 25 years I can garantee that you wont be paying 7% interest on your mortgage

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Hi Werewolves

FWIW about at present about 70% of people go for fixed rates, therefore I can't see why you don't think people can't get fixed rates. THe banks put a premium on the product, if interest rates fall they make money if the rise more than expected they lose money. Or in fact the people they sell the debt to do.

P.S. Before anybody pops a cap in my ass about the 7% interest rate scenario, can you promise my unequivocally that interest rates will not rise for the next 25 years?

If you fix for 25 years I can garantee that you wont be paying 7% interest on your mortgage

I didn't say that people couldn't fix rates. What I am saying is that it won't save the housing market and many people will go under. Particularly the BTL crowd. People will get caught with their pants down, they always do in bubbles.

The majority of people do not have 25 year fixed rates. The 5 (and even 10 year) deals will run out and people will get shafted.

Even if they did, do you think UK lenders could operate with a 10-20 billion pound loss per annum? In my experience the banks usually outsmart people, not the other way around.

Edited by werewolves

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I didn't say that people couldn't fix rates. What I am saying is that it won't save the housing market and many people will go under. Particularly the BTL crowd. People will get caught with their pants down, they always do in bubbles.

The majority of people do not have 25 year fixed rates. The 5 (and even 10 year) deals will run out and people will get shafted.

Even if they did, do you think UK lenders could operate with a 10-20 billion pound loss per annum? In my experience the banks usually outsmart people, not the other way around.

I agree fixed rates wont save the market, I've never said they would. What I say is if you are worried about interest rates rising then you should fix.

Indeed the majority of people don't have 25 years fixed rates, But why should people be shafted when their 5 and 10 year deal finish. Interest rates could be (and The gilt yeild predicts) lower. Have you special financial sensors somewhere?

Why would the lenders be making 20B loss from these, they provide a margin. If rates go above that then they lose, if they don't they win. They also sell these so if interest rates rise 2% and everyone has fixed for 25years (how you make the loss), this is spead amungst the whole community. There are plenty of pension funds out their willing to take on ten year deals at about 5%. Basically it wont be the banks that lose, but the pension funds.

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Another thing you have to factor in is inflation. Inflation is good for a mortgage in that it reduces the size of the debt (but bad for the property value). If the difference between the inflation rate and interest rate does not change, then the ability to service the debt is also unchanged. Ok inflation is pretty poorly defined and interest rates are quite sharply defined, but its not too wild an assumption that an individuals income increases at a rate close the published inflation rate :unsure:

Its even possible that if you manage to fix your rates at a low rates and then we go through a high interest rate high inflation period then you could end up paying less interest in real terms than you did at the previous interest rates.

Something to think about anyway.

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its not too wild an assumption that an individuals income increases at a rate close the published inflation rate :unsure:

maybe not in the past. But in the future? :ph34r:

there's certainly a strong body of opinion on this forum that we are about to endure rising price inflation without commensurate wage inflation. I think that is a strong possibility - and the worst of all possible outcomes for the housing market.

it is different this time - the crash will assume a new and unprecedented form.

Edited by Fancypants

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maybe not in the past. But in the future? :ph34r:

there's certainly a strong body of opinion on this forum that we are about to endure rising price inflation without commensurate wage inflation. I think that is a strong possibility - and the worst of all possible outcomes for the housing market.

it is different this time - the crash will assume a new and unprecedented form.

Tis true its possible that wages won't keep up for many. :unsure: But just wanted to point out that that it is the difference between income inflation and interest that is key when it comes to servicing debt. Income inflation is pretty must as important as interest rates. There are other forms of income too for some (investments etc.) that may fair better than wages.

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Tis true its possible that wages won't keep up for many. :unsure: But just wanted to point out that that it is the difference between income inflation and interest that is key when it comes to servicing debt. Income inflation is pretty must as important as interest rates. There are other forms of income too for some (investments etc.) that may fair better than wages.

Good point. Most people don't see the balance between wage inflation and price index inflation. A CPI of 2.5% with 4% wage inflation is good. A CPI of 2.5% with wage inflation of 1% is obviously not so good.

My boss at work was happy because he had a 1% pay rise coming. I didn't have the heart to tell him this was tantamount to a pay cut.

:unsure:

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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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