What caught my eye this week.
A few months ago I wrote about stress testing your mortgage ahead of higher interest rates. The threat has hardly abated, with the Financial Times noting that:
Borrowers now looking for another offer as their fixed period comes to an end will face much more expensive terms.
Average rates on a two-year fix have nearly doubled from 2.24 per cent a year ago to 4.24 per cent this week, according to finance website Moneyfacts.
The FT article (search result) adds that banks and building societies have pulled lots of mortgage products off the market, and they are being particularly quick to yank their most competitive mortgage deals.
The best table-topping rates might only be available for a few days before capacity is exhausted.
Hunting high and low
So far, so hairy.
Yet arguably we mortgage holders have never had it so good.
Because what would be spectacularly odd to any time traveler from the 1980s – who oddly chose to gawp at yield curves rather than, say, the iPhone – is the clear blue water between inflation and interest rates.
The UK CPI inflation figure favoured by the government and the ONS dipped unexpectedly this week. But it’s still at 9.9%.
The officially semi-defunct RPI figure that remains widely used in contracts is 12.3%.
Meanwhile the Bank of England’s Bank Rate is only 1.75%!
True, Bank Rate will surely be raised to 2.25% next week – it would already be there were it not for the period of national mourning – and given the state of core inflation I wouldn’t rule out a hike to 2.5%.
The pound falling adds even more pressure to raise rates. Sterling weakness makes imports (and commodities) even dearer – and we import a lot in Britain.
Yet even a 2.5% Bank Rate would be sat 8-10% below inflation, depending on how you measure the latter.
Whereas for most of my life – up until the financial crisis – interest rates ran well above inflation:
Source: Schroders
The Bank of England mandarins are of course familiar with this graph.
But from the start, this current inflationary episode has been seen as more a problem of supply than demand.
And despite a shocker in the US data this week, there are signs the inflationary impulses that set this ball rolling are, well, rolling over.
Inflation is still expected to fall back towards target by 2024.
The sun always shines on TV
As for demand, does anyone have a sense the UK economy is roaring?
Not me.
Perhaps the housing market has been running a bit hot. But aside from that it would be a watered-down punchbowl that the Bank of England would be taking away were it to get rate-rise happy.
Even an expansionary fiscal plan from the new UK chancellor in his Budget next week would only be giddying-up what seems like a pretty stagnant economy.
It’d probably add a smidge to long-term inflation expectations, because just like last week’s energy relief plan it will likely add to long-term borrowing.
But I don’t see the Budget setting off one of those Tory booms that gets named after the chancellor later when the blame is doled out. (Barber, Lawson…)
An end to conflict in Ukraine would fire up the old animal spirits. But that might equally reduce some of the global price pressures and supply chain issues that were already easing before Putin sent in his tanks.
(Of course I’d take it regardless of its impact on the price of eggs or mortgages).
Take on me
Odd as it seems then, I’d bet five-year fixed rate mortgages will peak at around 4% – at least for this cycle.
Even with inflation running at high teen double-digits for a short while.
In other words, it probably won’t get much worse from here, from a borrower’s point of view.
Of course your guess is (almost…) as good as mine. Events can do a number on economic expectations, anytime, anywhere.
What’s more the Bank of England’s commendably honest and downbeat talk has not been matched by as aggressive a campaign of rate rises as we’ve seen from some of its peers. Maybe the rate-setters will lose their nerve?
Time will tell, but for now inflation is fast paying off your mortgage in real terms.
Enjoy it while it lasts!
From Monevator
Expected returns: Estimates for your financial planning – Monevator
From the archive-ator: Financially independent in ten years: a plan – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Mini-budget expected on 23 September to reveal new PM’s fiscal plans – Sky News
UK inflation falls to 9.9%, but still close to a 40-year high – Reuters
Pound hits 37-year low as retail sales slide – BBC
The Queen’s death could tip the economy into recession – Yahoo Finance
Why the King won’t have to pay inheritance tax on his estates – Sky News
Britain’s lowest-paid workers say finances have never been worse – Guardian
Switching to renewables could save the world trillions, Oxford study funds – BBC
World Bank warns higher interest rates could trigger global recession – Guardian
Why you should continue to own equities after you retire – Vanguard
Products and services
Natwest and RBS offer £175 switching bonus to new and existing customers – ThisIsMoney
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
‘Confirmation of payee’ checks spread, but millions still unprotected – Which
If you must have a second home then you also need a ‘guy’ – MarketWatch
What happens if you don’t pay your bills? [Podcast] – Which
City centre homes for sale, in pictures – Guardian
Comment and opinion
How the worst market timer in history built a fortune – Compound Advisors
Why medics – and everyone else – can benefit from a high savings rate – White Coat Investor
Is it best to take the 25% tax-free pension lump sum in one go or in chunks? – ThisIsMoney
If you want to be wealthier, let go – Darius Foroux
Should you invest more after a market decline? – Of Dollars and Data
Is the obesity epidemic a threat to your retirement? – A Teachable Moment
The pros and cons of multi-generational living – Humble Dollar
The most dangerous phrases in personal finance – Thomas Kopelman
Swedroe: look beyond expense ratios when choosing index funds [Nerdy] – TEBI
Working late mini-special
The over-65s forced to join ‘The Great Unretirement’ – Guardian
Can’t stop working – Humble Dollar
Tax traps warning for over-65s returning to work [Search result] – FT
Crypt o’ crypto
The Ethereum merge has happened. What does it mean for investors? – CoinDesk
NFT traders pay more for pretty cryptopunks [Research, PDF] – SSRN
Naughty corner: Active antics
How to get venture capital returns from liquid public securities – Sparkline Capital
[US] inflation’s terrible, horrible, no good, very bad day – Advisor Perspectives
Why we (over) trade – Morningstar
What does the post-crash venture capital market look like? – Both Sides of the Table
How the ‘risk-free’ US Treasury Market has become more fragile – New York Fed
Kindle book bargains
Winners: And How They Succeed by Alistair Campbell – £0.99 on Kindle
I Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle
How To Own The World by Andrew Craig – £0.99 on Kindle
Quit Like A Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen – £0.99 on Kindle
Environmental factors
Patagonia’s billionaire owner gives away company to fight climate change – Guardian
The mysterious, vexing, and engrossing search for the origin of eels – Hakai
Climate change is tweaking the taste of wine – BBC
Shell names renewables chief as its new CEO – ThisIsMoney
How global investors reacted to the Paris Agreement on climate change [Research, PDF] – SSRN
Off our beat
Remembering Black Wednesday: part one [Podcast] – A Long Time Ago in Finance
The future of fast food – Slate
Watching the lying-in-state: a meditative quality all of its own – BBC
A mother avoided thrills, then her son discovered roller-coasters – Walrus
The rise and fall of General Electric [Podcast] – Business Breakdowns
Aleatory – Indeedably
And finally…
“It’s the job that’s never started as takes longest to finish.”
– J.R.R. Tolkien, The Lord of the Rings
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Inflation paying off your mortgage is only true up to a point since it assumes wages keep pace with inflation. This isn’t the case for most people especially those in the most tightly squeezed parts of the public sector. I’m not sure I’d advise my younger self to make a career move into teaching in further education for example!
Appreciate the “Aha” moments from this week’s newsletter…
Yes .. we have negative interest rates at 70s levels. As mentioned above, the only problem is that my wages are not going up like they were then,
Econometricists turn white when you ask whether inflation is demand- pull or supply- push. Even in retrospect it’s usually impossible to say. It’s also about as hard to call the fixed income market as the equity market so I don’t try. There’s a tonne of articles out about how the fed will blink when bankruptcies start but I just think it’s hopium
As a mid 30s aged parent of 2 primary school children, late 40’s earner, currently relatively comfortably investing £1000 a month to FTSE AllCap but with a 32 year mortgage of 130k and a 5 year fix ending in March 23.
I imagine there are a good chunk of silent watchers to this blog just like me…I think I am running my affairs in an ‘optimal’ fashion, am I missing anything obvious due to the ongoing inflationary environment?
Honestly the worst aspect of the whole economical situation at the moment is waiting for *something*, *anything*, to happen.
Sure the S&P 500 and the ACWI are both down 20% YTD, but if you look at the 30 year chart for the S&P 500 total return index, on a log scale, things look positively uneventful.
https://i.imgur.com/3SZ2w39.png
The same is true of house prices and the job market. I’m still hearing of people increasing their salaries by 50% jumping jobs, and still losing bidding wars on properly while offering £50K over asking.
I always hear the argument that house price inflation doesn’t help homeowners because after all if you sell you still need somewhere to live and other houses will have gone up in price too. However, when inflation is higher than interest rates that means the real value of your mortgage is decreasing, meaning you have more equity and could actually afford to move to a more expensive house. Of course there are moving costs, tax etc so it’s all much of a muchness, but I do think inflation can be a positive for homeowners with mortgages. Maybe it’s time to get my spreadsheet out to prove the point…
@Dan – does temporarily redirecting the investments into mortgage overpayment potentially let you remortgage at a LTV which allows a less painful mortgage renewal interest rate?
@wephway
I think inflation is positive for home owners IF they have a strong chance of real pay increases over a decent length of time.
Early retire FIRE types who left well paying jobs, with large mortgages, may find inflation more a curse than benefit – (ie me, too early to start worrying yet but not looking forward to mortgage payments increasing 6 fold and property prices falling 20%)
@wephway @Boltt — Provided they are not concerned about the consequences of house price inflation on wider society, house price inflation is definitely good for home owners.
I know many delude themselves otherwise, but your own property is an asset and an investment. If it quadruples while you own it, it makes you richer to that extent:
https://monevator.com/why-house-is-an-investment-and-an-asset/
Saying that you don’t benefit from owning property until you sell and leave the housing ladder (presumed at death) is a smug thing that people who already own their own home say, perhaps to feel less guilty when confronted by those who don’t.
The first properties I looked at were two-bed flats in London in the mid-1990s, priced about £60,000 to £80,000. I didn’t buy for reasons recounted elsewhere, and carried on renting for (from memory) about £400-500 a month, sharing with a friend.
When I did finally buy in 2018, my 2.5 bed flat cost roughly ten times that. My other choice was to rent a two bed flat of equivalent quality for at least £2,000 a month (the estate agents say £2,500+ but I can’t believe it).
In contrast, friends who did buy in the late 1990s had paid off their mortgages, and sat in property worth about the same (presuming they didn’t remortgage along the way). Yes they couldn’t spend the housing equity as ready cash. But equally they didn’t have to find £700,000 / £2,000 a month to put a roof over their head.
If they hadn’t bought they wouldn’t be c. half a million or more quid richer.
And if house prices hadn’t gone up they wouldn’t be c. half a million quid richer 🙂
@David Searle @PC — Real wages do go up ahead of inflation over the long-term, even in the productivity starved UK. Agreed in the short term there can be some mismatches, such as now, but mortgages are multi-decade affairs. 🙂
@Kript — 😉
@Ben — Agreed it’s difficult, but I think Covid/lockdowns make it more straightforward big picture (if more complicated in the detail) than usual. I’d agree though that we may be transitioning to new forces… that was the fear in the US numbers this week I think, that roiled the market.
@Dan — Even if we could give personal advice (we can’t!) that’s not enough to go on. An advisor would need to know salary, savings, other assets, etc. But I’d second the call from @Xeny to see if modest overpayments might put you into a more attractive band for a lower rate. I think I need to write a post on this, in fact. 🙂
@Andrew — The growth drivers of the US stock market (tech, especially disruptive and cloud) have been utterly roiled over the past 18 months. Totally derailed. They’ve been recovering since about June. I expect the bottom is in, personally, but that’s worth the few seconds it took to type and nobody knows anything for sure. If inflation persists much longer than expected then markets could definitely plunge further. But really we’ve had a good few years of messed up economies, and household and company balance sheets don’t look too stretched. (Government is a different matter, but that’s a long term issue). I don’t think it’d take too much good news for things to pick up next year, and the stock market will sniff that out first. Time will tell.
@TI
Looks like I wasn’t paying enough attention to Wephway’s comment – I was talking about general inflation not House inflation.
Clearly increasing house prices is great if you own houses (especially when they are increasing more than cpi/wage growth, finance costs, and even better if leveraged)
@TI – I could imagine a scenario where if the developing world’s productivity and hence living standard expectations rises fast enough and the world is significantly resource constrained then cost of goods could rise faster than UK real incomes (and certainly public sector real incomes have gone nowhere fast in the UK for some time at this point) for quite some time.
@Xeny
Due to house price inflation I should be 60% LTV, if a remortgage valuation put me sightly over I could deploy cash to bring me under no problem, given my debt is small compared to other areas of the country.
@TI yes fair enough, my question was poorly phrased really, it was more of an “overpay vs invest” question, one which I swing back and forth on constantly, and which perennially has no clear-cut answer it seems, but so far have stuck to the investment side of the argument
@TI, your reply re benefiting from house price growth covers the benefit of house price ownership ie imputed rent, not house price growth.
If your friends homes were still worth what they paid for them when you bought yours, and you paid the same as they had, what difference would there be for them ?
@ Dan – if you can’t decide between ‘invest’ or ‘overpay’, why not do both, 50:50?
@BBlimp – Hmm, yes, I see what you’re saying. Perhaps you guys are right in that sense, and I’m answering a different argument here, somewhat reflexively. 🙂
Yup. If you’ve got a 5 year fix rate mortgage, an income that’s broadly inflation linked then you are on the winning side. In a de-accumulation phase, fixed income (annuity?) or a salary that’s not keeping track with inflation then you are probably losing.
@ David Searle. Yup. Being in the public sector is great in a very wealthy country or a country that’s on the up. Take two teachers, one in Switzerland the other in Swaziland. Economically, one has a materially higher standard of living than the other. Why? Are they genetically different? The superior race? Of course not, one won the postcode lottery, the other didn’t. At least economically. Through that lens you can see clearly why UK public sector workers have broadly speaking had minimal / negative real wage increases in the UK over the past 15 years. It’s hard to move forward individually when your country is going backwards economically relatively to others.
The last decade have been great for asset owners. Perfect for the FIRE movement. Falling rates + globalisation keeping inflation down. Easy to believe in the 4% rule. 2022 has reminded everyone playing the 4% (or other SWR type of game) is damn hard. Worth remembering that the 4% rule covers worse investing scenarios than this one. But it’s pretty tough this year – the toughest for a decade at least. Much harder than 2020 in my view. Take the S&P 500 – fallen best part of 20% now, CAPE more reasonable. But 1 year treasury is 4% – 400bps increase in a year! Doesn’t look so cheap against that. I didn’t see that one coming.
The last few years are constant reminder that no one has a clue what’s coming down the track. Brexit, Covid, UKR. All very unpredictable.
10% inflation and the best mainstream asset has been….cash. Didn’t see many people pushing that one. er cash is trash anyone I think someone quite wealthy and famous said?!
@14 Dan – Don’t know your precise position but if you are thinking of saving – 1 year gilts are paying out 2.9% at the moment (TG24). If your mortgage is <2.9% then it's probably better buying one year Gilts assuming you are a highe rate tax payer than putting it in a savings account. For ex, if someone's got a 5 year fix at say 1% and is thinking that when they refi it's looking 3.5% – 4%. Rather than overpaying they'd be better off buying the Gilts. There's a tax advantage vs savings accounts as GILTS are CGT Tax free.
The psychological advantage of saying if it all goes t*ts up then no one is prising me out of my home is priceless. It's a key component of a position of F*CK you. Why owning is so much better than renting generally.
Everyone else….keep your portfolio the same, keep accumulating, try saving a bit more, maybe spending a bit less. Head down, plough on!
@seeking fire please can you explain how an ordinary investor buys gilts – I assume you mean direct rather than through a gilt fund/ETF? Thanks
@Martin T
https://www.hl.co.uk/shares/shares-search-results/t/treasury-0.125-31012024-gilt
The YTM is around 2.9% last time I looked on Friday.
Other longer yields below
https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk
The nominal interest is taxable but the capital gain is tax free.
Naeclue reminded me the other day……
“Switching to renewables could save the world trillions, Oxford study funds – BBC”
“finds” surely – though “funds” may be more accurate if the Oxford institutions funded the study themselves 🙂
Mortgage lenders were required to stress test rates at SVR+3% (~6.5%) when determining affordability, even on fixed rate mortgages. This requirement was removed in Jun-22 and it’s now left to lenders to determine how they will stress rates.
The 30-40y fixed rate mortgage providers are able to lend more to certain borrowers given they don’t need to stress rates.
There was an article in Bloomberg this week (below) pointing out that high income borrowers can get 5.5x rather than 4.5x salary. This has generally always been true as banks are restricted to 15% of new mortgages being >4.5x and you’d rather provide these to higher earners.
@Unwilling Codemonkey – you can lend to Oxford on their 100y bond at 59p/4.3% yield to maturity currently. For an organisation older than the Aztecs it’s perhaps not such a long time (duration is much lower).
https://www.bankofengland.co.uk/news/2022/june/financial-policy-committee-confirms-withdrawal-of-mortgage-market-affordability-test
https://www.bloomberg.com/news/articles/2022-09-14/uk-banks-loosen-loans-rules-for-rich-amid-cost-of-living-crisis
Firstly, thanks for the great blog. I have been a reader since 2011/2012 and really appreciate all the hard work. I am still waiting for the Monevator book!
I was reading the article about the Pound hitting 37-year low as retail sales slide. It got me to thinking.
I earn in Sterling but live in the Eurozone. Therefore, my expenses are basically all in Euros. I have been saving into Vanguard Lifestyle 60% for simplicity. However, checking the portfolio, I see all the bond holding are hedged to Sterling.
With the pound taking a hitting, I am figuring maybe this product isn’t suitable for my situation. I was thinking of building my own portfolio 60:40 portfolio out of FTSE Global All Cap Index Fund and Global Bond Index Fund or even Euro Government Bond Index Fund. I cannot figure out if these are hedged to Sterling or not. Not sure if anyone can clear this up for me?
@ David Searle – you’ve hit the nail right on the head. Wages have not kept pace with inflation for millions of those employed in the public sector. In fact most of us in the NHS have seen our wages decline around 20% or more in real terms over the past decade. This year I’ve been offered a ‘generous’ 1.8%. Little wonder the government encouraged people to give us a clap during Covid-19. It was free but it doesn’t pay the bills.
@Joe
The FTSE Global All Cap Index fund is unhedged but both bond funds you mention are hedged. This info can be found in the Key Investor Information documents for each investment on the Vanguard website: the bond funds are marked as “GBP hedged” in the headers, whereas the All Cap fund mentions in the detail that “Movements in currency exchange rates can adversely affect the return
of your investment.“
@NewInvestor – Thank you for the information. I should have picked up on that myself. My understanding, therefore, is that the Lifestyle 60% or the bonds funds I mentioned are not fit for my purpose. GBP hedge will effectively be adding a lot of currency risk to my portfolio. Hopefully I am understanding that correctly. Do you know of any unhedged alternatives or even Euro hedged?
@Joe
If you have a scan of the ETF space with justETF.com you’ll find a goodly number of liquid euro denominated bond ETFs, most obviously iShares Core Euro Corporate Bond UCITS ETF (Dist) (LSE: IEBC) and iShares Core Euro Government Bond UCITS ETF (Dist) (LSE: SEGA). There doesn’t appear to be a London listed global bond ETF hedged to the euro, but if you wanted to diversify beyond the eurozone I would have thought iShares US Aggregate Bond UCITS ETF EUR Hedged (Acc) (LSE: IUAE) would do a pretty good job.
If mutual funds are more your bag iShares also do a variety of global bond funds unhedged as well as hedged to the euro. Whether your platform offers them will be a different question.
I think hedging to the £ makes a lot more sense today than it did a few months ago, to protect the gains we’ve made due to sterling’s dramatic fall. I usually split my equities 50/50 hedged/unhedged by now 60/40 and prob 70/30 if we go $1.1 and 80/20 at parity. Is this market timing or dynamic allocation? I think of it as rationally reactive rather than naughty active.
@Joe’s strategy must surely depend not just on what his salary is but where he is tax resident and where he plans to live in the future (is he likely to want to cash in savings in pounds or euros?) If he can make use of UK tax-efficient savings vehicles (ISAs and SIPPs) it may be worth putting up with what he can access on the normal UK platforms; if he can’t he needs to keep an eye on exchange rates and get cash moved over so he can invest elsewhere. I don’t think many of us know much about funds denominated in euros, but it looks as if the Irish and Luxembourg markets have some options.
Thanks for all the feedback.
To be honest, I am not 100% sure where I will be living in the next 10,20, 30 years. It just struck me the last few days, that having 40% of my wealth hedged to a currency I am not using now, isn’t a very good strategy. I will have a look at all your suggestions. For now, I found this from Monevator:
https://monevator.com/passive-fund-of-funds-the-rivals/
I am leaning toward the Fidelity Multi Asset Allocator. The unhedged bonds would work for me, I think. I like to keep things as simple as possible, I don’t want to get too hung up on different allocations here and there.
@Johnathan B – I will have to consider long term what I do with my assets in the UK. Maybe at some point I will have to bite the bullet and move into Euros.
@Joe- I have/had similar dilemma(s) to you. I live in the Eurozone (earn in USD) but a reasonable 50/50 chance most of my future spending needs will be GBP.
I’m probably doing it wrong but decided that Lifestrategy (or equivalent) didn’t really make much sense. I opted to build my own (roughly 70/30 portfolio) with zero hedging and hope that diversification and frequent rebalancing would do the work. On bonds a basically buy SYBZ (which is global bond fund traded in Euros).
I’ve tried to let my equity allocation do some of the insurance on this by being more overweight UK equities than a standard market cap would be. Again it’s perfectly possible I’m doing it wrong (so DYOR etc.).
In your case I think being diversified away from the UK (both bonds and equities) works as a type of hedge.
Jonathan B- Makes a good point about your tax residency being an important consideration.
Also, to the other point, virtually every ETF (from Vanguard, I Shares etc.) can be brought on a European exchange denominated in Euros but if you’re earning in GBP it doesn’t really make sense to convert currency unless it’s for day to day spending (IMHO).
@Hague – great shout on the SPDR® Bloomberg Global Aggregate Bond UCITS ETF (Dist). It also trades in pounds on the LSE. Might be a good option for some of my bond allocation. Thanks for the heads up.