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25 Year Fixed Rate Mortgage - Gb's 'miracle' Solution

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http://www.nationwide.co.uk/mediacentre/Pr...his.asp?ID=1034

With 25-year fixed rate mortgages being spun as another of GB's miracle solutions to the housing crisis, it's worth to do some quick figure work for a typical mortgage of £150K

Monthly repayments:

£800 IO

£1,000 for a repayment mortgage

So in order to keep mortgage costs to 1/3rd of net income, you need net monthly earnings of between £2,400 and £3,000 ..... not exactly the national average I would have thought.

This leaves two options to bridge the 'affordability' gap.

1. The mortgage rate needs to be lower

2. The mortgage needs to be smaller

With option 1 looking very unlikely in the short/medium term with oil/food inflation gathering pace and credit crunch under way, this leaves option 2 as the most likely.

Now, how can we perform this Brownite miracle by other means than a sharp fall in house prices :lol: ?

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plenty of industry experts debunking it now as puff and air; standard life reckon you have needed to move mortgage 6 times, surprise surprise :rolleyes: (in a like for like comparison over the past 25 years) in order to find the cheapest deals. Moneyfacts go into more detail:

http://firstrung.co.uk/articles.asp?pageid...articlekey=6551

http://firstrung.co.uk/articles.asp?pageid...2&cat=2-0-0

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The Americans (not sub-prime) routinely have deals which are fixed for term except that they may redeem early or re-finance downwards with little or no penalty. They have vast quasi-public corporations (Freddie Mac, Fannie Mae) to do the financial wizardry required to make this happen.

So it's not such a bad idea. Back in 2003 when GB was touting it the first time it would have been a brilliant idea.

Of course the fixed rate is always 1-2 percent above the SVR, so you need some slack in your initial budget to take it on.

The issue of fixed rates breaking the MPC's control of inflation is interesting. In the US raising interest rates works by making credit cards cost more, hence reining in spending. Over here maybe new levers of control will be required, although raising IRs also work by raising the value of sterling and so making imported items cheaper.

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;)

The issue of fixed rates breaking the MPC's control of inflation is interesting. In the US raising interest rates works by making credit cards cost more, hence reining in spending. Over here maybe new levers of control will be required...

New taxes? How will they even think up any more? :lol:

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the 25 year mortgage is to be backed by uk government bonds.

its easy to see the big point here in this. its about insulating the house price economy from interest rate fluctuation.

if all mortgages are fixed for 25years, then interest rates can be moved up at will and the uk house price based miracle eceonomy will not be affected.

this has a beautiful double bonus for gordy.

1. he stays in power cos voters are not screwed by rising interest rates. mortgages not affected.

2. global money flow increases into the uk attracted by high returns in a high interest rate environment.

so its a good solution for simultaneosuly sustaining the 2 major drivers of the uk economy, housing and global capital traffic. (ie the financial industry)

the downside is it will negate a house price crash as prices wil not drop if interest rates rise. its even worse than that however, it may actually lead to higher prices, if mortgages are backed by uk bonds then the banks can lend MORE with less risk. the bottom line is it is designed to sustain or even increase house prices and stop a crash which would see gordy ousted.

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BBC: http://news.bbc.co.uk/1/hi/business/6295352.stm

If the mortgage was portable, so you could move house, I would be very interested when I buy.

The BBC's expert thinks "...we are near the top of the interest rate cycle."

Yeah, right. Well, maybe nearish, for this year, until the MPC realise they still have done too little.

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As someone with a 20 year fixed loan (at 3%) I think this is a good idea. Of course, all the lenders etc will come out and say how it won't work etc. or say people don't want them because they make such a huge wedge through people changing to new mortgages. Also, if structured properly there should be no reason why you can't move with only minimum fees. Here in Japan (hence my low rate) I can pay off my loan in full with relatively small fees.

Clearly, a 25-year fixed at a reasonable rate makes a lot of sense not least because you know exactly what you will have to pay and it will go down in real terms with inflation. When I got my loan last year, the mortgage lender was trying to persuade to take short term deals at 2% but I preferred the security of knowing exactly what I'll need to pay. It also, I guess, will take the boom and bust from the market to an extent, because people will be less affected by rate swings.

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the 25 year mortgage is to be backed by uk government bonds.

its easy to see the big point here in this. its about insulating the house price economy from interest rate fluctuation.

if all mortgages are fixed for 25years, then interest rates can be moved up at will and the uk house price based miracle eceonomy will not be affected.

this has a beautiful double bonus for gordy.

1. he stays in power cos voters are not screwed by rising interest rates. mortgages not affected.

2. global money flow increases into the uk attracted by high returns in a high interest rate environment.

so its a good solution for simultaneosuly sustaining the 2 major drivers of the uk economy, housing and global capital traffic. (ie the financial industry)

the downside is it will negate a house price crash as prices wil not drop if interest rates rise. its even worse than that however, it may actually lead to higher prices, if mortgages are backed by uk bonds then the banks can lend MORE with less risk. the bottom line is it is designed to sustain or even increase house prices and stop a crash which would see gordy ousted.

I totally agree; effectively separating the housing market from the rest of the economy will reduce associated risk. However, the ‘fixed’ cost of the mortgage will still depend on when the mortgage is taken out, so IR environment will affect the level at entry into the market – ergo price fluctuations (albeit at a lesser deviation).

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The issue of fixed rates breaking the MPC's control of inflation is interesting.

Which makes it an ideal Brown idea. He'd love to control what, and how much people spend their money on, through his Tax Credits system. All he has to do is add a housing element, and he's have far more control of the housing market that MPC have.

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http://www.nationwide.co.uk/mediacentre/Pr...his.asp?ID=1034

With 25-year fixed rate mortgages being spun as another of GB's miracle solutions to the housing crisis, it's worth to do some quick figure work for a typical mortgage of £150K

Monthly repayments:

£800 IO

£1,000 for a repayment mortgage

So in order to keep mortgage costs to 1/3rd of net income, you need net monthly earnings of between £2,400 and £3,000 ..... not exactly the national average I would have thought.

This leaves two options to bridge the 'affordability' gap.

1. The mortgage rate needs to be lower

2. The mortgage needs to be smaller

With option 1 looking very unlikely in the short/medium term with oil/food inflation gathering pace and credit crunch under way, this leaves option 2 as the most likely.

Now, how can we perform this Brownite miracle by other means than a sharp fall in house prices :lol: ?

I would say that the average wage for a couple is 3k per month after tax. Thats 25k a year each, taking home 1,500 after tax.

I would suggest everyone does the maths quick, and works out whether to buy now at this superb fixed rate, or waits three or four years, get a 25% reduction in the price of the house, but pay 9% for your mortgage.

Nationwide relaunches 25-year mortgage deal

Laura Howard

Thursday July 12, 2007

Guardian Unlimited

The majority of 25-year fixed rate mortgages are now portable. Photograph: Frank Baron

Nationwide building society today responded to Alistair Darling's call for longer-term home loans by announcing the relaunch of its 25-year fixed rate mortgage from July 17.

The long-term deal was originally made available on March 26 this year, but due to unprecedented popularity and a limited allocation of a £50m tranche of funds, it ran out just five weeks later on May 3.

This time the mortgage will from part of the lender's permanent portfolio, but following a 0.5% rise in the base rate since May is now priced considerably higher than its original 5.49%. It will cost buyers 6.39% to fix in during the typical mortgage term, while remortgagers will pay 6.49% up to a 90% loan-to-value. Both deals come with a £599 reservation fee.

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These mortgages simply put the price of houses UP. The better the mortgage deal, the more people are prepared to borrow so they borrow as much as they can and prices go up.

They do, its hard to imagine they can lend this money so cheaply, however from what I have read they have a huge tranche of unexpected cash lump, and are offloading it.

For sure if you wait, prices will go up as a result of the cheap deals, hence my line, get in quick by working it out for yourself.

The sum is simple, 9% mortage in 3 years time, and house prices may have dropped 25%, or take mortgage at a little over 6% today, and have it fixed for 25 years.

I am just waiting for the chorus "But rates are going to go down" and therefore have a bucket to the ready as I really dont want another trip to the dry cleaners.

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They do, its hard to imagine they can lend this money so cheaply, however from what I have read they have a huge tranche of unexpected cash lump, and are offloading it.

For sure if you wait, prices will go up as a result of the cheap deals, hence my line, get in quick by working it out for yourself.

The sum is simple, 9% mortage in 3 years time, and house prices may have dropped 25%, or take mortgage at a little over 6% today, and have it fixed for 25 years.

I am just waiting for the chorus "But rates are going to go down" and therefore have a bucket to the ready as I really dont want another trip to the dry cleaners.

The choice is: negative equity at a lower rate or positive equity at a higher interest rate.

You have financial freedom with option two. And it's easier to pay off the capital.

Also, you seem to assume the rates for these new 25 year mortgages will fluctuate with the base rate. In which case, what stability are they going to bring to the housing market?

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I think im beginning to see the grand plan.

The 1/4% cut in interest rates in August 2005 was to keep the housing market going untill

Gordon took over in 2007. Where upon housing becomes the main priority, which means keeping the housing market from crashing becomes Gordon main priority.

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The choice is: negative equity at a lower rate or positive equity at a higher interest rate.

You have financial freedom with option two. And it's easier to pay off the capital.

Also, you seem to assume the rates for these new 25 year mortgages will fluctuate with the base rate. In which case, what stability are they going to bring to the housing market?

Fixed rates do not fluctuate, whoever has told you that needs to be shot!!!.

The fixed rate available today, is just that, fixed.

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I would say that the average wage for a couple is 3k per month after tax. Thats 25k a year each, taking home 1,500 after tax.

I would suggest everyone does the maths quick, and works out whether to buy now at this superb fixed rate, or waits three or four years, get a 25% reduction in the price of the house, but pay 9% for your mortgage.

Taking as an illustration the £150K original figure, a 25% reduction would equate roughly £110,000. A 9% fixed-rate 25 year repayment mortgage would work out at £920 pcm. So worth waiting ......

Big question is - if house prices are 25% down in 3/4 years, obviously a lot of people are going to find themeselves in serious NE with the consequential massive impact on the economy. Do you still think IR are likely to reach, let alone stay at, 9% for long? (even if inflation is way above the 2% target ......).

Regarding the £3K required joint net monthly income - what if they want to have kids? Simply not affordable.

This is the point of my original post - a 25-year fixed rate mortgage is simply not an option with current house prices and interest rates. The argument about the 'security' of fixed repayments is rubbish if hardly anyone can afford borrow the sort of money currently required to buy their first property.

This is spin of the worst kind from Gordon Brown who simply won't accept that house prices are too high and keep banging on about affordability ..... Well I suppose a 25% shared equity on a 40 year old IOM mortgage might just work until the next election

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Fixed rates do not fluctuate, whoever has told you that needs to be shot!!!.

The fixed rate available today, is just that, fixed.

The negative equity v lower borrowing is another story.

It will be down to affordability, FTB'ers often have very little equity worthy of a mention, mostly less than 20%.

Banks will be looking at affordability, and someone with a fixed rate of repayments at 1k per month, is a better option than someone on a variable rate at 900pcm with rates predicted only upwards.

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Fixed rates do not fluctuate, whoever has told you that needs to be shot!!!.

The fixed rate available today, is just that, fixed.

:rolleyes:

Thanks.

I was talking about the fixed rate of the new 25 year fixed rate mortgages that are taken out in three years time.

These long dated mortgages (like the US) will be based on 25 year government gilt rates which do not fluctuate anywhere near as wildly as the repo.

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The negative equity v lower borrowing is another story.

It will be down to affordability, FTB'ers often have very little equity worthy of a mention, mostly less than 20%.

Banks will be looking at affordability, and someone with a fixed rate of repayments at 1k per month, is a better option than someone on a variable rate at 900pcm with rates predicted only upwards.

Except with FTBs so stretched they are likely to think short term and opt for variable.

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none of this addresses the fundamental issue - that a 25 year term is way too short for most average folk trying to buy the average house at the moment.

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