Monday, May 11, 2009

If mortage rates are rising now, how will things be when the base rate goes up?

Mortgage rates on the rise

"Ray Boulger, a mortgage expert with broker John Charcol said that the profits lenders were making from home loans were now “the highest for a very long time”, with banks and building societies putting up their rates to protect their profits ahead of the expected surge in repossessions later this year."

Posted by quiet guy @ 11:10 AM (1664 views)
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11 thoughts on “If mortage rates are rising now, how will things be when the base rate goes up?

  • Along with China this may explain our recent Stock (cash injection) Market rally?????????

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  • If you have a play with the Times mortgage calculator and put in a few scenarios, it just shows you how a potential buyer could be EASILY misled to thinking how great an investment a house is.

    http://www.timesonline.co.uk/tol/money/calculators/article5771800.ece

    – Interesting is that the lower your deposit, the greater the influence of notional house price gains over time. This encourages LOW DEPOSITS.

    – There is no possibility to lessen the term of the loan

    – If you take a long term view on all the numbers, it just shows how widely sensitive the model is —> implication it really is a LONG TERM discussion.

    Using todays micro bull rally to be fooled into buying is almost criminal

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  • Hmm.. Interestingly, rates for savers are on the up as well. My bank is offering about 3.5% cash fixed (no ISA, no bond, just cash), and it is not aksing me to fix it for something like the next 5 years. The minimum term is only 9 months, which is about the time I reckon IR will go up.

    The banks probably realised that they cannot count on GB to print every penny. They need savers!

    So the market is rational, it is just government policy and MP expenses are not.

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  • @ 3,The rational is sometimes rationed.

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  • Hi peter_2008,

    “which is about the time I reckon IR will go up”.

    I noticed the Telegraph article today and the one in the Guardian last week on Mortgage Rates creeping upward. Are you reckoning that IRs will go up in January, 2010 – by how much?

    I’m thinking of an August/September BoE rise of about 1.25%. This will probably follow poor results in government bond auctions over the next 3 months. Any views from our experts?

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  • Peter, Government policy is rational, they act in their own interest just as we do. The difference is, that the private sector have to sell stuff to voluntary consumers, whilst government get to spend tax money (and inflation), expropriated by force, from people who cannot opt out of their programs. Good work if you can get it.

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  • alan –
    I think the economy will be seen as slowly improving in the second half of 2009 (and I don’t mean that I think house prices will start rising) – it seems to have started to come back in Asia now. The interest rates should be able to come up relatively slowly, but there is always the chance that all the bailouts & stimuli come back to haunt us in the form of inflation, in which case rates would be put up faster.

    If you’ve got a tongue and a finger, lick the former with the latter and stick it in the air… your guess is probably as good as any “expert’s” 🙂

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  • ^^ I must add, however that I think we will stagnate for a year, but I don’t think the official statistics will say that, especially with the looming election here in the U.K.

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  • @ Peter_2008

    What bank is that then? Thanks!

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  • vindicated @ 8 First thing – Disclaimer: My advise is based on my own experience and my specific circumstance, so think well and do your own research, please!!

    HBOS gives 3.45% on 9 month fixed rate (minimum £500). I would also suggest open 4 or 5 fixed accounts (split your money between) and try to make they maturity dates about 2 months apart, so you don’t get trapped in emergency situations or miss sudden rises in IR.

    Remember don’t put all your eggs in one basket, whether it is property, cash, gold, bond, stock or lottery tickets!!

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  • I’m fairly sure interest rates will go up. Banks are by no means obliged to lend at teh base rate (unless teh gov owns three quarters of their shares!). As demand for loanable funds increases (and assuming a fixed money supply) the price of borrowing must rise too. Interest rates rise to ration out the limited supply of money. It’s fair to say that at any point in time teh money supply is fixed. Gov can of course print money but this is inflationary and £25bn per month into M2 is not huge. The big problem we’re facing (and America especially) is that up until now our borrowing was funded in part by Asia and a large part of it by China. Over time the Chinese consumers want to have the lifestyle that we have in the West. They’re driving through in 20 years what it took us 150 years to do. OIfc ourse all they need do is copy what we did right adn avoid what we did wrong!

    China sold more cars than America for the fourth month running and a large part of these cars were bought on finance. That means China is saving less as a country adn spending more. Good for their economy, bad for anyone they leant money too, they’ll be wanting it back to buy stuff. On top of that you’ve got teh gov borrowing record amounts, America borrowing record amounts. If they inflate their way out of trouble the damage will be pretty severe. Living standards will fall and employent will rise (see Fisher Curve).

    Also, the market is pricng in inflation, and higher interest rates. One of the reasons Bond spreads are so high (it costs a blue chip company over 6% to raise money) is because the market is pricing in either inflation or higher interest rates, or both.

    The good news? WEll most of us go by RPI which will be very low since it has a component of hosuing costs which are falling, and will likely do so for anouther 2 years.

    Ultimately leave the market to set interest rates. The market (not to be confused with a bank) is the best way to allocate resources. If lots of poeple demand loans, few people have savings, the cost of borrowing will rise. This will put further downward pressure on everything that is purchased with debt, housing, cars, DFS sofas etc etc. It will increase many firms costs too, so expect further gains in unemployment and writedowns by teh banks. I’ve heard today (I work for a wealth management firm) that the US banjks are expecting to dump another $1.5trillion (or just over the GDP of teh UK) of dodgy assets either onto teh sahareholders or the taxpayers.

    Happy saving everyone!

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