Fixed Rate

[gilf]

We all know the current trend to get a fixed rate deal. There are some decent deals out there but they tend to be for those with a bigger deposit or a remortgage for less than the property's current worth.

So what would the situation be say in a years or 2 years time where people who bough in the last year or so on a fixed rate. If the market dips significantly lets just say 15% and were into a dropping market, how many mortgage lenders are going to be happy to offer mortgages to those wishing to get out of their now variable rate mortgages, given that despite what they say "Just fill in the forms and we do the rest", they do actually send somebody round to do a valuation. Given you have only been paying for 2 years you would have paid off virtually nothing of the actual mortgage only interest.

So for example. Somebody takes a 2 year fixed rate mortgage for £100,00 in October 2003 when the rate was at the low of 3.5, from doing a bit of reasearch fixed rates seem to be at about 2% over the base rate so that makes it about 5.5% this works out to £621.24 a month. After the 2 year period its expected that rates could be a round lets say 5%, the fixed rate mortgages I was looking at then revert to about 0.5% about the original fixed rate on a variable rate so lets say the new rate would be 7.5% the monthly payment on that would be £747.01.

Thats a big increase to take in one hit.

One final thing, there's plenty who have self-certed, with the new regulations comming in these peolpe may find it virtually impossible to get a new self-cert remortgage.

any thoughts ?

[hedi]

very valid point not picked up in the papers. made worse by the fact that some of those fixed rate deals were for rates less than 3.5 pct. the old incentive racket.

which could mean that the amount in payments could almost double.

in respect to the remortgaging, im not sure thats a problem, the forms have been filled in, and as long as the monthy payments are made i dont think many queations are going to be asked.

[TWOPEY]

Maybe it'll finally filter through to people that they should hold back on the 'must have' widescreen TV & all the other household accessories that TV tells us 'will only add value'. The family holiday may have to go on the backburner for a couple of years as well.

It may finally convince people that paying off the debt DOES come into the whole equation sooner or later.

Heres one for Gavs 'This Fridays Next Bubble' list

Go long on belt tightners for the over leveraged.

[gilf]

in respect to the remortgaging, im not sure thats a problem, the forms have been filled in, and as long as the monthy payments are made i dont think many queations are going to be asked.

I think in a rising market thats true but in a market thats going down I'm not so sure. Certainly when I remortgaged a few years ago they sent somebody round to do a valuation.

[hedi]

gilf.

i dont know the situation as ive never mortaged, but would that apply if you kept with the same mortgage company.

[TWOPEY]

Gilf

I stayed with the same company for remortgage then they didnt send anybody round . Just a form to be signed & that was it . This was a couple of months ago.

[c_f]

Hedi: If you remortgage with the same comapny, they tend to use their own 'house price index' and check the value of your house against that.

They will only do a valuation if you want to remortgage for more than the value on their index (eg if you've done a big extension which you think puts another 10% on the value of the house). And this is only likely if you want to MEW to the max.

[Martin]

Say if i remortgage to put an extension on my house and it maybe its puts 10% on the value, if my house drops by 20% then surely i could end up with a mortgage larger than my home is worth.

But back to the topic, fixed rates, are a bad idea, its like buy now, pay next year, unless you can sell the house for the same amount that you got it for, before the end of the fixed rate mortgage, you could end up in trouble.

BBB was trying to sell me a fixed rate mortgage for me to become a BTL, at the begining i would make money on the BTL, but after the 5 years i could have real problems. If house prices continue to go up then it would not be a problem but if they went down, i would be left with trying to find the capital to pay what i owed on the mortgage.

Yours

Martin

[George Mainwaring]

A genuine fixed rate is fine. Where the rate is actually fixed at the same percentage for the same period as the lock in. These generally are better value than SVR which seem to carry a "lazy premium" and are also used to cross subsidise discounted rates.

The problem is the deals which offer a Too Good To Be True introductary rate with a longer tie in to a very poor rate (SVR or worse).

[nickbooker]

We were the first to expose this last week. The Mail stole our story and presented it poorly yesterday. The original press release is on our website Mortgage Timebomb Press Release

[gilf]

hedi, yes that is possibly correct that if it was with the same company might not send somebody round.

But alot of people who have fixed rate are looking at doing is getting another fixed rate at the end of their current deal, this could most mean moving to another provider.

I think the end of those of fixed rate self-certs might be a bigger issue.

[gilf]

Thanks for the link nickbooker. Worth a read as it present the point far better than I was able to and in fact presents it in a may that is even more concerning than my examples.

The Northern Rock one for example is particuarly scary.

It gives a list of people who are particularly at risk.

Properties with 80% - 100% loan to value mortgages

New Build Properties

BTL

Self Certs

Properties purchased since 2001

All areas we have been discussing could be in trouble come a down turn.

[c_f]

These are not fixed rates. They are discounted rates.

The only people that I can think of for which these are appropriate are those who expect to have big pay increases/change in circumstances by the time the discount stops. I looked at these when I took out my 'proper fixed rate' and couldn't believe the payments at the end of the discount!

The details of the mortgage payments would have been explained by the building society. I mean, it's going to be *very* difficult for a BS to hide a 4% rate rise at the end of the discount and most people would be aware of the hike in payments.

Of course it's a 'mortgage time bomb', but the person who took out the mortgage will be watching the clock ticking down. Maybe a little sesationalist.

[George Mainwaring]

For some bizzare reason the idea took hold that 3.5% was now the normal level for interest rates

[gilf]

The details of the mortgage payments would have been explained by the building society. I mean, it's going to be *very* difficult for a BS to hide a 4% rate rise at the end of the discount and most people would be aware of the hike in payments.

Of course it's a 'mortgage time bomb', but the person who took out the mortgage will be watching the clock ticking down. Maybe a little sesationalist.

Of course there are some people like yourself who did a bit of research, but there are plenty who have been desperate enough to jump on the ladder and in the process taking anything they could get.

The BS would have explained that rate's have been going down and are stable even with a number of rises it would be unlikely to get anywhere near 4.5%.

Take for example the Northern Rock Fixed Rate thats quoted. It was fixed at 2.49% great value even then, but the SVR then would have been around 4% which at the time would'nt have been seen as too bad. They would have explained that you get a really cheap mortgage for 2 years and then it would only be around 4%. So they would'nt have seen a 4% hike but something more like 2%.

discount, Fixed Rate or whatever doesn't matter peolpe have these mortgages.

Never said it wasn't sesationalist, makes a change for it to be sesationalist from a bear perspective.

[nickbooker]

I was indeed being sensationalist offering the Northern Rock deal as an example. I have come across many examples of first-time buyers and buy-to-lettors that have fixed rates about to come to an end of between 3.89 and 4.99 from 18months ago. These were sensible fixed rate deals at the time. They presume they can move onto a fix of about 5.5% now and take a hit but a manageable one. For thousands (I have met cases ALREADY) their properties are actually worth a little less now than when they paid. They CANNOT remortgage to say 5.5% instead they are on SVRs of approx. 2% above base (6.75% today). This is terrifying. I know a first time buyer who bought a property in 2003 - her mortgage is going up from £670 a month to £1350ish! SHe can't believe it is happenning. ANother example Buy-to-Let £480,000 18months ago - now worth £425kish. He can't remortgage so is going from monthly cashflow break-even (£1500 rent and £1500 mortgage) to a monthly deficit of £997. Unbelievable chaos will occur within the next 6 months if rates don't come down (unlikely) or property prices don't rise. The main problem is obviously London, high LTV and new developments. With slightly bigger falls (say 10-15% in house prices) hundreds of thousands will be caught. The other massive problem is surveyors down-valuing property that they previously would have up-valued. What happens next is not pretty and will be a significant contributor to a down-turn in the market as people will sell or be unable to pay and get repossessed.

[hedi]

i have been aware of this for some time, and have oftten posted it. it is an unbeleivable time bomb.

thanks for finding actual figures.

what would be interesting to try and find out when these fixed rate deals will start to end ,and how many people are at risk.

i have an incling that 2 years ago this was in full swing, but more like a year ago, so next summer it might really hit.

[George Mainwaring]

It will be a staggered effect. Not one big bang but a whole series of smaller ones. This will push the market in the direction that it's already going (down).

However, these people are a spent force - it's what the FTB/STB/TTB's who are not caught in the bubble do that will effect the future of the market. They won't return in force until income multiples are comfortable IMO.

[gilf]

However, these people are a spent force - it's what the FTB/STB/TTB's who are not caught in the bubble do that will effect the future of the market. They won't return in force until income multiples are comfortable IMO.

I think thats right. Ther has already been discussion on here about FTB's and STR's jumping back on the ladder to early and halting any big downward trend. But I think the very fact they have satyed out so long (appart from being unable to afford) will mean they will be in no urgent rush to jump back on.

There's quite a different between pushing yourself to the limit in an upward market so you don't lose touch and pushing yourself in a downward market.

Also if there is a minor crash, there will be plenty of BTL horror stories in the papers putting potential new BTL's off.

[c_f]

They would have explained that you get a really cheap mortgage for 2 years and then it would only be around 4%.

Were SVR's ever at 4% !? Discounted mortgages always presented a huge hike in payments. An extra 1% (if your one of the relatively small number who took at a discounted mortgage when rates bottomed out) due to rate rises constitutes only about 20% of the expected rise in payments:

Best case:

2.5% in years one and two

6% SVR in years three to five

Actual:

2.5% in years one and two

7% SVR in years three to five

Anybody who doesn't allow for that small additional increase is doomed to failure anyway.

[RJG18]

Some of the worst scenarios are going to be for the people who took a rock bottom discount rate at the bottom of the rates cycle (e.g. 2.49%) for a year ot two, and will now come out into a SVR (or even an "SVR+x%" lock-in deal). For someone who borrowed £150,000 on this kind of deal, interest only, their repayments would increase from around:

£320 a month

to as much as:

£900 a month

if base rates are up to around 5.5% by the time the discount period ends.

Combined with a potential fall in the value of the property (even a small amount) such people are guranteed to be "distressed sellers" or repossessed.

[c_f]

It's just that the 'time bomb' aspect is not a big story.

The person on the £150k mortgage would indeed have to pay about £900 today(rather than £320 when the loan was taken out). But they would have anticipated the rise to be about £830 anyway (The mortgage agreement would have it printed in black and white), even if rates had stayed at the low levels at which they were when the mortgage was taken out.

So the great 'time bomb' amounts to a *surprise* increase of only about £70 per month.

[gilf]

The mortgage agreement would have it printed in black and white

No it wouldn't. It would have said something like 2.49% fixed then onto our SVR.

By its very nature the SVR is not fixed therefore they (the BS) would not have quoted a fugure simply because they had no idea what the base rate would be in 2 years time.

Were not talking about discount rates, were using the quoted 2.49% fixed Northern Rock. Sure it might be an extreme example but there is bound to have been plenty of peolpe sucked in with the lure of historically low interest rates.

[c_f]

Whether it is fixed or discounted may be a semantical argument. It is in effect a discounted mortgage in that a discounted rate is offered initially on the proviso that the full svr (or svr+ x%) is paid for the remaining term (imo).

The rates after the first two years would have been calculated (printed) based on an apr linked to the rate at the time of the calculation.

[RJG18]

C_F, I believe you have too much faith in people being rational, careful fortward planners. I'd be surprised if the majority were. MAny people want things as cheaply as possible here and now, and give less regard to how they will afford things in years to come. If this wasn't the case then we'd all be putting far more into savings and pensions than we do.