Another round of interest rate hikes from central banks. Another month that sees mortgage rates rise, too.
Which means a bigger monthly bill for anyone not on a fixed-rate mortgage – or whose deal expires.
Oh, and inflation is rocketing. It’s already above 9% and the Bank of England now foresees 11% by October.
All of which has gifted us a cost of living crisis.
Suddenly the pound in your pocket (or your fintech app) is like a heroine in a Jane Austen novel – pursued by suitors from all sides.
We haven’t had to think about rising interest rates or inflation like this for years.
Higher and higher
Many people were shocked by energy prices soaring in 2022, for example.
Fair enough, that inflationary surge came out of the blue.
But there’s no excuse with your mortgage. We’ve been on notice that quantitative tightening was coming. Six months of interest rate and inflation speculation – as well as huge moves in the underlying bond markets, if you’ve paid attention – means we can’t say we weren’t warned.
The good news is UK mortgage rates are still low. At least compared to history.
However we have seen mortgage rates rise well off the Mariana Trench-like lows of last year.
Back then banks were practically giving away money like they used to hand out free piggy-banks.
Not anymore. According to broker L&C, the average two-year rate has trebled since October:
“…the average lowest two-year fixed-rate in June came to 2.71% and the average five-year fixed-rate rose to 2.78% … up from the historic lows of October, when an average two-year fixed rate was 0.89% and an average five-year fixed rate was 1.05%.
Mortgage Solutions, June 2022
A big jump for sure. However it is comparing today’s rates with a freakish, short-lived low.
Looking at the last 20 years to the end of 2021 better puts the recent mortgage rate rise into perspective:
Source: Statista
As you can see, today’s mortgage rate levels only takes us back to where we were in 2014. And rates have been far higher before then.
Given this headroom for still-higher rates and the pace of recent hikes, it’s not too late to stress test your mortgage. You want to find out how you’d cope if mortgage rates rise further.
For the rest of this article we’ll look at interest rate risk and your mortgage. Next week we’ll run through a checklist of other issues you might face with your borrowing.
Repayment risk: keeping up as mortgage rates rise
Most people today are on fixed-rate mortgages. In my view this is a good thing, compared to when more people were on constantly-fluctuating variable rates.
Everyone used to do a lot of opining back then about whether it was a good time to take out a fixed-rate mortgage versus some other kind of product. They’d try to predict where interest rates were going.
But there’s no good reason for the average Joe to be speculating on the direction of rates like that. We have multi-billion pound markets that struggle to get it right. You’ll probably do better only by luck.
This lack of edge isn’t the reason to go fixed-rate, though.
In fact it actually makes the case for choosing a mortgage that tracks the variable rate, perhaps with nice discount applied. That’s because in theory the market has already digested everyone’s best guess of future interest rate moves. So it should all be in today’s prices/yields.
And indeed, discount tracker mortgages that follow rates often do prove cheaper than fixed-rate mortgages over time.
No, the real reason to fix your mortgage is for certainty and budgeting.
A fixed rate is like an insurance policy. It takes the risk of higher rates off the table for as long as your fixed-rate mortgage deal lasts.
This means that if you can make your payments now, then provided your income and outgoings at least stay constant, you know you’ll be able to do so in the future.
When you have a massive liability like a mortgage tied to something as precious as your own home, that’s very reassuring.
How higher mortgage rates increase your payments
Alas, all deals come to an end. And when your current fix expires you’ll probably want a new fixed-rate deal, which is likely to be more expensive than the last one you took out.
First-time buyers obviously can’t lock-in the low rates of yesteryear, either.
So everyone will have to grapple with today’s rising rate environment.
And to belabour the obvious, these higher rates will mean higher monthly payments going out from your squeezed household budget.
Below are some examples of how monthly payments will ratchet up as mortgage rates rise. To illustrate I’ve assumed someone remortgaging with 20 years left to go:
Monthly mortgage payments at different interest rates
| Balance, 20-year term | 1% | 2% | 3% | 4% | 5% |
| £250,000 (repayment) | £1,156 | £1,274 | £1,400 | £1,533 | £1,671 |
| £500,000 (repayment) | £2,309 | £2,548 | £2,801 | £3,066 | £3,343 |
| £250,000 (interest-only) | £208 | £417 | £625 | £833 | £1,042 |
| £500,000 (interest-only) | £417 | £833 | £1,250 | £1,667 | £2,083 |
Source: author’s maths
From the table we can see the magnitude of changes coming in people’s mortgage payments.
For example if you have a mortgage of £250,000 and you’re coming off a 2% fix, then at say 4% you’ll see your payments go up by £259 a month.
Of course you’ll have to do your own sums with a calculator to get your figures.
For my part, if I remortgaged today I’d guess my new fixed rate would be about 3.3%, judging by my lender’s current published rates.
That compares to the just-under 2% rate I’ve paid for the past few years.
A move from 2% to 3.3% doesn’t sound like much.
But with my interest-only mortgage it directly translates into monthly payments that are 65% higher.
Ouch!
The bright side of inflation
A 65% rise in monthly payments is ghastly from a sticker shock perspective, but I think I can take it. I also have a couple of years worth of payments set aside in cash as a back-up.
However if rates keep rising before I secure my next five-year term then it could start to get hairy.
(As with most fixed-rate deals, I would have to pay a small penalty in this final year of my term if I remortgage before it expires. I’d rather not!)
Higher rates stretch the case for staying invested versus repaying my debt, too.
How high would be too high? If the best five-year fix I could get was more than about double my current rate, I’d perhaps look to pay down the mortgage when my fixed term expires – or to take some other remedial action.
- Again, play with a mortgage calculator to stress test your own repayments.
The decision is not a no-brainer because inflation is running even more rampant than interest rates.
And that means today’s very high inflation is eroding the real terms value of our mortgages at quite a clip.
In fact if you’re paying 3% interest on a mortgage when inflation is running at 9%, then you’re kind of getting a real return of 6% on your debt!
In practice there’s more to think about. If your salary isn’t outpacing inflation or house prices go into reverse, you may not feel so lucky. And the ‘real return’ from a negative mortgage rate applies at a real terms net worth level. It’s obviously not actively reducing your nominal mortgage balance.
Also – crucially – you must be able to make your mortgage payments to benefit.
Repossession during a huge economic downturn is to be avoided at all costs!
So can you afford the higher payments?
Of course, simply seeing how your monthly payments are going to jump as mortgage rates rise doesn’t do much but give you heartburn.
You now need to take this figure and assess how it affects your overall household budget.
One way to do this – suggested by The Escape Artist on Twitter – is to calculate your interest cover figure. This is similar to how companies indicate their borrowing level to investors.
To do this you simply divide your monthly after-tax income by your monthly mortgage payments.
For instance, if you bring home £3,300 post-tax and your mortgage is set to cost £1,000 a month, you have an interest cover of 3.3x. That shows you could pay your mortgage more than three times over from your income, ignoring the other demands on your money.
However as that innocuous ‘ignoring’ suggests, I’m not sure how useful this figure will be for most.
You can perhaps compare your new coverage level to your current one to get a sense of how much more stretched you’ll be with higher payments.
But really, for individuals who occasionally take out a two-to-five-year fixed rate mortgage, it’s better to think in absolute terms rather than comparative ratios.
I’d simply plug your predicted higher monthly mortgage payments into your monthly budget if you have one – or into your best guess if you don’t.
What is left over after paying the mortgage and all your other bills? How much are you eating into your disposable income? (Will you still have any disposable income?)
The answer to these questions could warn you it’s time to tighten your belt.
If you want to get fancy, you could even model out the life of the mortgage term and inflate up your other spending to try to forecast a few years ahead.
If you do this, don’t forget that – hopefully – your take home pay should be increasing, too.
Longer-term interest rate risk: could mortgage rates rise to 10%?
The outlook for rates (and inflation, and the economy) is very uncertain.
The market seems to think rates and inflation will more or less settle down within the next couple of years. And that ultimately the wailing “awooga!” sirens will turn out to have been a temporary notice to take cover. As opposed to warning of a long-lasting stagflationary apocalypse.
However we’ve never before come off 5,000-year lows for interest rates. Let alone after a global pandemic. Never mind while a war rages in Europe.
So could we see interest rates head higher than expected? Mortgage rates of 6%? Or 8%?
It’s possible. But I do find it hard to envisage.
If mortgage rates rise much above 6% or so, many people could struggle. We might then see a wave of defaults, forced sales, a house price crash, and a vicious downward spiral.
At the same time the government would also face huge rises in the cost of repaying the national debt. Perhaps taxes would rise.
It all sounds deflationary – and likely to cause the Bank of England to cut rates.
That’s not to say it couldn’t happen. And I’m definitely not making a moral case for bailing out homeowners.
I just think it’s likelier that the Bank of England – and the UK Treasury – would lean towards accepting higher inflation versus triggering economic meltdown.
Indeed given the UK is carrying more than £2 trillion in national debt, many politicians might see chronic debt-eroding inflation as something of a happy outcome.
We are (probably) gonna make it
There are cataclysmic views out there as to how this all ends, but I’d keep some balance.
For instance since 2014, the Bank of England has mandated new borrower’s should face a stress test to see if they can still afford their mortgages if Bank Rate rises by 3% over a five-year period.
That’s one reason I believe we’ll escape a total meltdown as long as mortgage rates stay below 6%.
But who knows? All sorts of costs are rocketing and piling on the pressure, and there’s not much you or I can do about the big picture anyway.
Our challenge is navigate these choppy waters while preserving our future financial security.
How we save and invest is a big part of that, as is staying in the game as mortgage rate rise. So get stress-testing – and start to take some budgetary evasive action if you have to.
Next time I’ll go into more detail about my own stress test. Subscribe to ensure you get it.
As someone who has a 5-year fixed rate mortgage end at the end of the year, I’m looking at interest rates with some surprise!
Rates for new mortgages are now about 50% more than I’m paying and over 150% more than only a year ago.
Given how the markets are volatile and a key pillar of financial independence is not to just build the biggest lighthouse but to avoid the biggest waves – I’m toying with the idea of just repaying the mortgage at the end of the year.
I’m lucky that I can do that of course – for a lot of people they won’t have an option but to suck it up and pay.
The 20 year period of unhealthily low interest rates isn’t over – they’d have to hit 10% to escape negative real rates – but this little ratcheting up is likely to do a lot of damage!
My fix is due to expire in November and has a 1% early repayment charge.
Am I crazy to consider refixing this month at 1% cost? In the case of a 3 year fix, I would only need mortgage rates to increase by 0.4% between now and November to make the fee back over the 3 year term but I read that interest rates are expected to go up by 1% by the end of the year…thoughts?
I’m old enough to remember when people rushed to fix when mortgage rates came down to 10%…
A timely article for me. Me and my partner had an offer accepted two weeks ago and HSBC are actually valuing the house today. We’ve recently seen a lot of reductions on Rightmove, and are worried about the state of the market.
Here are some facts running through my head right now:
– It’s probably closer to a 5+ year home than a 10+ year home.
– Buying means we’re burning the equivalent of 18 months of our current rent on stamp duty and other costs.
– We are putting down 15%, and have applied for a 5 year fix at 2.69% with a 33 year term, which will make me 70 when it’s over if we don’t overpay…
– The 85% mortgage is 4.9x my gross income and 3.9x our joint income
– My partner may not be able to continue her career if we have kids.
– This will result in a monthly payment of 46% of my take home pay after maxing out pensions.
– All this means when the 5 year term is up, without over paying, we’ll own 9% more of the house (so a ~75% LTV when it comes to refinance)
With regard to stress testing, I’d be crazy not to be worried. If in 5 years rates are 5%, the mortgage repayment over the maximum 28 year term will rise to 60% of my current take home pay. If it hits 7%, it will be 73% of my take home pay. We could survive at this level, on rice and beans, but I’d most likely have to turn off pension contributions at this point.
US 30-year fixed rate mortgages are now just shy of 6% (say 5.75%). Despite a flattening US yield curve, wider credit spreads have taken these back to levels last seen around 2010-11. This is less of an issue in thhe UK since fixed deals are shorter. Nonethless, even if front end rates don’t rise to more than the 3-3.5% priced over the next 6-90 months, if wider credit spreads persist, expect 5-year and 10-year fixed rate deals to suffer.
@Andrew congratulations on finding a home! Why the challenges facing first-time buyers is not a priority for the parties in Westminster is a mystery to me.
I managed to secure 10Y Interest Only Fixed @ 1.89% (60% LTV) three months ago, but have been sitting on it to see how market plays out, but i think now needs to be decision time.
I’ve loved my current First Direct offset mortgage (BBoE +1.74%) for the last 10Y, and recently extended back to 25Y term… but this was a period of falling rates and the current trend is clearly not.
Previously I was saving to pay off the house in 10Y, but decided not to and now I don’t have any motivation to pay off the house, and would prefer to still keep investing the money in S&S ISA.
I think my change of investment preference (house -> S&S ISA) and change of interest rate direction (down -> up) does constitute a material change to my investment strategy, whereby a 10Y fixed I/O is a better choice to give monthly payment security and free up cash for investment… but I’m still trying to push myself over the line, although each interest rate rise is making the decision easier! ha!
@The Investor Also, do you have any tips toward getting an interest-only mortgage in future? There’s a whole discussion to be had around repayment plans required by lenders these days. Something tells me “I’m going to throw the difference into a broad based index fund” isn’t acceptable to most lenders.
As house prices are so high with accordingly high levels of debt, the average Britains sensitivity to interest rates is also correspondingly high.
Put simply if people were previously able to get mortgages at 1% and are now going to be faced with 4% or 5% then one would expect a house price crash and recession. Exacerbated by cost of living going up and tax rises.
For that reason, I agree rates will seem to go up slower and real rates will remain [deeply] negative. All of which makes sense to run debt but only if you have a salary or business generating profits that will be positively linked to inflation. Think Mastercard or Visa! If you’ve lost your job, on fixed or low growth pay then paying off the mortgage is sensible (may be sensible anyhow).
I was fortunate to take out a five year fix back end of last year. Even more fortunate not to invest the proceeds yet.
Andrew – doesn’t sound to me as if you can afford the property.
Remind me again which way living standards are going ?! 🙂
@Seeking Fire I’d love to know why you say that, since this is a pretty typical situation for anyone in their 30s buying a house at 4-5x earnings.
The reality is if you’re in your mid-30s, as I am, it’s likely now or never when it comes to property ownership. Even with a 7% return over 25 years, investing the difference wouldn’t get me to a point where I could own my own home when I retire.
Andrew, I certainly had to provide a lot of information and a very clear plan that I had the means to take out an interest only mortgage, it was much more stringent than I anticipated. The repayment vehicle criteria was as follows:
· Sale of other property: Cannot be used in conjunction with any other repayment strategy. Equity at time of application must be 110% of full interest only balance.
· Stocks & Shares ISA: Based on 100% of the projected amount
· Pension: Allow 100% of the tax free lump sum
I used a mix of stocks & shares ISA and Pension lump sums from both my wife and I, but it’s important to note we already held significant amounts in each and aren’t just starting out.
Buying a house is an emotional and personal circumstances thing, it’s too difficult to compare it with other investments and derive what is best. If you are planning to settle down and have kids, it’s most likely the best way forward irrelevant of market conditions. If that doesn’t float your boat (hindsight is a wonderful thing here ha!) and you still want to move around trying new jobs and cities, it’s perhaps better to just rent for the freedom. My houses and couple of BTL have all been excellent no stress investments over the 20 years I’ve owned property, I consider them like government bonds… they won’t make you rich over night, but will allow you to sleep soundly.
Andrew – I am old enough to remember my sister having a house in the early 80`s , if I remember correctly, the interest was 16% or even 18%. Not saying history will repeat itself, but it could.
@Gentleman sounds more like planning than luck.
Hopefully folks will be able to service the debt of higher interest rates, I’m old enough to have lived through a couple of high rates and housing price crashes and jumped on the ladder in the mid 90’s before they took off again. That taught me to not expect rates to always be low or high for that matter 🙂
The chunck of cash 50k I had in reserve to pay off the mortgage is now nestling away in an account taking advantage of an interest rate above current mortgage interest rate. I’ll review in 3 years when current fix ends what to do next.
I was planning to take the cheap mortgage way into FIRE time, that may well change now.
Yep inflation may be reducing what I could spend that 50k on outside of the mortgage, but it’s there for my mortgage and as long as it’s ticking above the mort% rate then I’m winning/sleeping at night.
The 50k came from cashing in some portfolio when shares hit high and the signs in the above article mentioned on this site things could change. I didn’t want to be greedy and have something to service that debt so I could sleep easy
Call it luck, call it good planning, me I’m paranoid and risk adverse. Cant win them all though.
“My houses and couple of BTL have all been excellent no stress investments over the 20 years I’ve owned property, I consider them like government bonds… they won’t make you rich over night, but will allow you to sleep soundly”.
In a world of declining bond yields over the past twenty years, I’m not surprised 🙂
Andrew – somewhat flippant response by me to a challenging problem. My point is your margin of safety as you have set out doesn’t seem very significant.
@Doodle Zack in 1992 in the run up to the UK falling out of the ERM, 16 to 18% sounds right, on the last day rates went up 2% in a day. Afterwards rates dropped back quickly maybe to 10 to 12%
If we are reminiscing on historical mortgage rates, I paid 13.75% when I bought my house in 1981. Two months later this jumped by 2% to 15.75%. These rates were 0.5% higher than the standard rate (the lenders – almost exclusively building societies then – were in a cartel), as I had a ‘larger’ mortgage (over £15,000!). You did get tax relief on the interest payments in those days.
Well, for once, makes me glad to be old and risk averse.
I’ve always been in the “pay off your mortgage” camp. The security and feel good factor is unbeatable. Our small £55k (?) offset mortgage is almost entirely covered. Apart from about £6k which is costing us £250 a year. Time to do something about that…
@Andrew – please ignore the paragraph above! But I think I’m siding with Seeking Fire. In this tightening cycle, your margins don’t look great. I appreciate the desire for stability/being invested in your home, but what about potential job losses? That’s the killer. In the 90s crash, banks usually worked with people who weren’t able to make full payments but managed something, but if you lose one (or both!) jobs, how will you manage to make any payments?
18 months of rent payments in Stamp Duty is a lot. Especially for a “5 year house” because you’re potentially/probably going to be doing it again soon. Are you saving significant money over renting?
And I think increasing rates are going to wreck havoc on leveraged BTL. Yes, people have to live somewhere, but prices are made at the margin so just 2 or 3% of tenants deciding to share 2 couples in a 2 bed rather than rent two 1 or 2 bed, move back home, sofa surf, drop out and travel the world, live in a caravan, could have a significant effect. Could you be in negative equity? For years and years?
I can’t relate to the “sick to death of renting and paying some barstewards pension” feeling (if that’s what you have), but can you wait 6 months to see which way the wind blows? If rates are rising, presumably people will not get the amount needed to buy. And aim for a 10 or 20 year house? I appreciate you’ll probably lose your mortgage offer, but it might be worth considering.
Whatever you decide, suerte!
@Brod Renting a similar home would be a couple of hundred quid a month cheaper , at best, in the same area, but that’s comparing the repayment and not the interest cost.
The interest component of this mortgage is cheaper than our current rent by ~£200/mo and we’re moving up from a 2 bed flat to a 3/4 terrace with a garden.
Rent Vs Buy calculations show we’ll be £100K+ poorer compared to our current renting situation, and investing the difference, over 5 years. But then having a family where were are now is unappealing.
There’s also no guarantee that rising rates will cause house prices to fall *enough* to be more affordable. Rates can rise and prices can fall, and everything can still be less affordable overall in the future…
@Andrew – I think you are getting in to analysis paralysis… if you need a nice home to live in, go buy one, worst case wait 6 months and see how things play out. Rates may go up, prices may go down, in reality you don’t know, so if you are ready to commit to buying a house go get one.
I bought and lived in 4 houses in 8 years in the 2000’s, it wasn’t planned it was just the way things worked it. Also, although it feels nice to max out your pensions, why not just ease off and put the money towards a nice house you can raise a family in now. Who knows, you may not even reach pensionable age, my father unfortunately didn’t, which put things in perspective that you need to get a nice balance of house, family, work, investment, with some short term gratification now and more later etc.
@wildFIRE In todays market, buying a house is easy and finding a house is hard. We had been looking for 3 months and bid over asking on 4 houses before winning this one.
We also haven’t actually stopped looking at other properties, despite having an offer accepted, the mortgage application going in, and solicitors details being exchanged. The current owners have yet to find.
I know mate, it was no different in the late 90’s, 2000’s etc, houses selling in days, going 25% over offers asking price, this is just a repeat… Apart from interest rates were 5%, albeit of a lower value of sale price, although salaries were less also!
I’m certain it’s been the same for centuries. Something will turn up, just have to position yourself to take advantage and go for it, without taking on too heavy a financial burden of course. You can’t live in a pension or ISA, and as nice as those things are, they are secondary to a nice place to raise a family in my opinion.
I’ve been watching bond yields and mortgage rates for a while. The rise seems inexorable.
In my corner of the Euro Zone standard rates (e.g. 5 year fix at LTV>65%) have tripled from (slightly less than 1%) to slightly more than 3% in a matter of months. So similar repayments to UK.
CPI here is a touch under 10% and wage inflation has been poor less than 3% (lower than the UK). So, presumably, considerable stress on household incomes. Yet houses currently around 20% higher than pre-pandemic! Mortgage interest deductability is a thing here so that will reduce some of the pressure on affordability but by no means all.
The national central bank (not ECB) have said they expect some ‘cooling’ but no ‘price correction’. I guess we’ll see on that but it seems like an optimistic take.
I have a lot of sympathy with @Andrew’s position. I’m sure few other buyers are stress testing their decision in the way that he is, which is, of course, one of the problems he’s facing.
Bit of context for the historical interest rate anecdotes:
https://i.imgur.com/CKHyKDp.png
In the ’90s sale price to income ratio was 4-6x, since 2002 it has been 7-9x.
@Andrew – it’s by no means now or never. I bought (admittedly outright) at 40, others I know have been FTB at 50+.
I would be wary of buying a house that you plan to stay in for just 5 years. You could easily get stuck. Would it be a deal breaker to stay there for 10+ years? If so, maybe it is worth looking elsewhere.
When (if?) house prices come down, it’ll probably be a slow drift down over a number of years. It takes time for people to become distressed sellers and it’ll probably happen at the margins first. Waiting six months will tell you almost nothing on the direction of travel, or allow bargains to be found.
Good luck.
I was on a ten year fixed rate and five years in when I fortunately checked what rates i could get in October and found that despite having to pay a large redemption penalty (£13k) I was still better off to the tune of £7k over the next 5 years to break the fix and change to a 0.99% interest only deal on 270k fixed for 5 years. Very very glad I did now
The bit I’m grappling with now is I have an unfortunate windfall of an Inheritance of around 160k coming In the next month or so . My natural inclination is to invest this when I’ll be effectively and very fortunately ‘mortgage free’ with enough to pay it off at any time in jon pension investments. But given potential interest rate rises am I better to use at least part of it to overpay or just wait till the fixed rate deal ends and see how the land lies ?
You’d have thought 5 years from now the market should be higher but its just short enough a timeline that I get a bit twitchy .
If I lost my current employment I’d probably suffer a substantial pay cut but would still earn enough to remortgage so I’m definitely leaning towards investing the lot
@Andrew I took out an interest only mortgage just before the pandemic as i wanted to invest more and got a rate of 2.5%y and like the comment above I was already on a 10 year fix and simply asked my provider if they’d do it .
You had to have less than 65% ltv and my mortgage was just over 2 x salary so very affordable. I was allowed to ticka Bix to say I’d sell the hous if I couldn’t clear in reality I already had good pension investments and about 2 thirds of the mortgage in isas so it was a no brainer for me .
Starting out I wouldnt even consider interest only I’d only do it once you know there’s no way you can’t pay it off or like we are now considering porting the mortgage and buying the ‘dream home ‘ that we’ll live in for a few years then likely sell and downsize
People need to be careful not to extrapolate current market moves. It’s been incredibly volatile few weeks, liquidity is appalling, the short convexity position is being utterly hammered. Nonetheless, the UK 10-year Gilt is at 2.50% (last seen around 2015). There is still a lot of wood to chop to get back to 5% (most of the 2000s). An awful lot of wood to chop before we get back to the 10%+ of the 80s.
It can happen. Inflation expectations inexorably rising due to a wage price spiral would have to be countered by very large rate hikes and deliberately forcing the economy into a deep recession. Add that to much wider credit spreads, steeper yield curve, would leave to vastly higher higher mortgage rates while house prices collapse.
Alternatively, the BoE hikes toward 3.5% as is priced. The economy craps out. Credit spreads widen horribly. The economy craps out more. The yield curve inverts massively. The BoE blinks, stops hiking and then starts cutting. Note the market prices cuts starting from September 2023; make of that what you will. The govt will play the usual game of finding any way to prop up house prices. Result: higher house prices, more debt, lower standard of living, kick the can. Business as usual really.
Which is more probable? Who knows, and there is everything in between. I’d like to see house prices a lot lower but frankly most of the public would prefer to gut their own children than see that.
You need to look at tail scenarios and decide in which ones you blow up. Those you avoid. What you cannot do is avoid scenarios where you take some pain. Markets like to move to whatever level causes people most people most pain. Buying a house now may well involve significant pain. But not buying a house may also involve significant pain.
@Andrew
You have to approach the house buying from two points of view.
No 1 can you make the payments ? You have a five year fix and if you think everything else is stable for five years then you are good to go. The refinancing may be an issue but its five years away…
Now if inflation goes up a lot, for a period of time, whatever the interest rates, you are deflating the real debt, it’s a great result, borrow a £1 and give them back 50p. I have played this game before…You just have to make the payments, now house prices may well stutter, but over time they will go with inflation, if inflation is bad your wages will also rise.
Rents will rise with inflation but you have fixed your debt, whilst interest rates vary your debt is declining by your repayments plus the effect of inflation. The loan to earnings ratio of 4.9 will fall with inflation. You refinance at 5 years and if interest rates are higher then see if you can bring the term down.
> Now if inflation goes up a lot, for a period of time, whatever the interest rates, you are deflating the real debt, it’s a great result, borrow a £1 and give them back 50p.
This only works if inflation leads to higher salaries. My theory is if salaries start to go up, taxes will just be raised to compensate. We’ve already seen effectively 2.5% put on income (1.25% employer/1.25% employee), and had our tax bands frozen for 5 years.
It’s the same with housing. Government has sucked in billions in stamp duty during the pandemic boom. If house prices fall and the market slows down even further, they’ll simply find another way to tax home ownership.
This was an incredible reading. Thanks as always, also to all commenters!
However, I am still confused and the reason – I am afraid – is that I am emotionally invested and for the first time I am putting intangible (emotions/feelings) on the my usual tangible (timelines, money) scale.
After many years of working hard, I recently bought a flat in London. I’ve been historically against buying in London (overpriced for the quality and size of the properties) also because, as a foreigner, the concept of leasehold is really hard to digest. They say only stupid people don’t change their mind, and finding a life partner on the path and having a nice cash bonus due to some company shares sold, i became a first time buyer in April 2022.
600k purchase, 15% deposit down, fixed 5 years at 1.88% (which in hindsight was a good choice compared to the 2 years).
And I find myself reading news, blogs, Reddit at night, thinking on what would make more sense: overpay now or invest? Or both?
Or shall I just save as much as possible in this 5 years to then drop as much cash as possible to help during the remortgage given than the rates will be much higher? Better do it now -but-wait-it’s-5-years-away…
I earn 3 times as much than my partner (and she has zero interest/knowledge of personal finance) and I feel responsible for every choice on this topic. I know this will affect my future and the family we want to create.
Sorry for the stream of consciousness: I should stop reading too much, and live the present because no one knows what’s going to happen.
@Andrew, anyone entering their first house purchase is taking a risk. You are always going to overstretch. Only you can decide whether it is right for you.
@Fatbrit, it is an interesting conundrum whether to pay off a mortgage on coming into money. Personally I did with my pension lump sum. How it would compare with investing in the stock market I don’t know, I thought of it more like investing in bonds (or buying an annuity) creating an extra stability to financial planning. But from your username, you may be subject to different political issues from in the UK.
@ZX, that may be your most pessimistic post ever on this site. Obviously no one knows the future, though you seem better informed than most of us. But the way I see it is that low interest rates have been an anomaly, historically they have been roughly in line with inflation, so normalising to somewhere near the target 2% inflation target isn’t so bad. But if they overshoot …
@Sony, you have made a choice and as I said above the first house is always a risk and is even more so in London (though not so much if you have salary to match). But essentially, everyone is in the same boat (commonhold hasn’t really taken hold, a legal possibility for a while now equivalent to copropriete in France and elsewhere) so as long as you don’t plan to stay so long the remaining lease looks low you will be OK. It sounds to me you have covered your bases pretty well.
@Sony your situation isn’t so different to mine. So at least we can share a paddle up shit creek together
I’m tempted to think that borrowers enjoying base rates of 1.25% at a time of 9%+ inflation are living at the expense of creditors. The government itself is, of course, the biggest debtor, so inflation is for them an expedient way of evaporating debt, at least as far as the fixed interest portion is concerned.
I guess the government will do everything to prevent a house-price collapse, since that would destroy its core support. Meanwhile, those who cannot get a pay rise or an additional return on their investments will bear the brunt.
@Jonathan. I’m not being bearish. I’m actually pushing back against the idea it’s not a good idea to buy a house in London. Most people (including myself) thought is was not a good idea to buy a house in London for about 20 years and prices have only gone up.
As I see it if you own your own home, you are marketweight. If you rent you are underweight. So it’s not owning a home that is the active position. So for someone about to buy now, the issue is not prices rising or falling, it’s the leverage. Due to the flat 2s/10s swap curve, however, the spread between 2 and 10-year fixes is just 20bp. You can get a 10-year fix at 2.75%. That’s a bargain and it hedges you for a very long time.
In hindsight, I should have gotten a 5-year fixed interest mortgage instead of a 2-year one last year, but hey ho, it was the better deal at the time and who knew what was going to happen. Not overpaying the mortgage at the moment but perhaps I should, in anticipation of the big hike at the end of the deal, assuming it’ll still all be crap in 1.5 years’ time.
Had a go on the stress test calc and things get uncomfortable for me around the 7% mark, not in terms of not being able to afford to live but in terms of not having any money left over to save/invest and I’d have to really rein in luxury spends.
@Andrew, it has not been my experience that anything financial related is “now’s the time to do it, or else I will never get to do it again as long as I live”. Rather, it has been my experience that everything is cyclical and everything gets cheap every once in a while (houses included).
You are taking on leverage to buy a want. You are not taking on leverage to cover a need, or else *any* house would do, you are taking on leverage to buy *this* house, in which you see yourself raising a kid or two. And that is ok. It’s fine to decide: this is what I want, this is the quality of life I’m working for. If we covered only our needs, our lives would be dreary indeed.
It’s also risky. And nobody here can tell you whether it’s an acceptable risk or not, because we don’t all want what you want. If you want the house and want the child and are willing to take risks with your financial position for some years then go ahead.
If you couldn’t afford the house and the kid at 7% interest rate, have a plan about what you will sacrifice if things don’t go according to plan, see if you still like the life that leaves you with and then take the plunge or not. Maybe you work more, maybe your wife goes back to work, maybe some creative third option. Accept the risk and start mitigating it.