Interest Rate Rise - a good idea ?

[Dai Corner]

I would rather be disappointed in a year rather than in ten years.
If I were to do the same struggle now of 75% of my salary saved for the next ten years, I'd end up with 60k to 72k and nearing 40 years of age.
That money would be enough to buy a rundown, two-bedroom flat in my area at its 2022 market value.

Let's hope that my salary to expenditures ratio stays the same. I would spend ten years living in my parents' house. I would forgo any vacation, adventure or mildly costly hobby. I would avoid having any kids or engaging in further education.

Then we have the issue of safe financial products costing us money instead of saving it. And we can't forget that said "real estate value" would still require reconstruction and furniture on top of its purchase!

Does it feel like all this hassle is worth it?

I don't know anything about the Portuguese housing market, but could you save for five years, put down say a 25% deposit and borrow the rest over 25 years? You should have enough savings left over to do the reconstruction and buy furniture?

Then by the time you are 60 you will have paid off the mortgage and maybe able to retire or take a lower paid job.

 

[Bletchleyite]

So you don't blame low interest rates?

No, I don't. They haven't substantially changed the rate of house price increase, which has been going on for absolutely years.

 

[JamesT]

* Short selling should be banned; betting on the failure of a company is a disgrace. Investment in companies should always be positive with a view to helping them grow.

It’s not necessarily betting on failure, just that the current valuation is too much. Markets are all about price discovery, taking out one side doesn’t help. Regulating out excessive practices such as naked shorting wouldn’t be bad though.

 

[johncrossley]

No, I don't. They haven't substantially changed the rate of house price increase, which has been going on for absolutely years.

I was paying over 7% from 1997 to 2003. That was considered a good deal! 7% would be unaffordable for many today. Meaning that house prices would never have risen to current values had rates been maintained at that modest (by historical standards) rate.

 

[Bletchleyite]

I was paying over 7% from 1997 to 2003. That was considered a good deal! 7% would be unaffordable for many today. Meaning that house prices would never have risen to current values had rates been maintained at that modest (by historical standards) rate.

7% would have meant longer mortgages, but if buying at 30 then you can have up to 35 years, so it wouldn't have done anything of the sort. Shared ownership also makes it affordable.

The fundamental problem is quite simply supply and demand. The population has increased by about 10M over the past 20 years or so, plus more people live alone due to marriage breakdowns etc than used to, but the housing stock hasn't anywhere near kept pace, particularly in the SE.

 

[ainsworth74]

But people are starting work later too. Back in the day many left education at 16 and as you say bought a house about a decade later in their mid-late twenties. You could work your way up and achieve an average salary by your late twenties.

A fair point and one I hadn't considered before! However I can't help but feel that the market is still being significantly distorted to the point that owning a home is getting more difficult (house prices are rising faster than wages) and therefore driving the age at which people can buy a home upwards even above any natural impact of remaining in education for longer.

We could go back to the time when social housing was more the norm and home ownership more of an exception? You got the house you were deemed to qualify for rather than the one you could afford.

Why not both? Why can't we have more social housing and shrink the private rented sector but keep home ownership itself? Seems to be plenty of demand for social housing so it's not like it would be taking much of a risk to support the sector and grow it...

If retailers and service providers are allowed to make money from customers spending their benefits, why not housing providers too?

It just feels perverse to me that we're happy to allow private landlords to increase their own personal wealth using taxpayer cash but we're not willing to let individuals do the same. That feels very different to buying food or services from a shop or other company. To me anyway. If we're happy to landlords to buy houses using taxpayer money why not homeowners?

Perhaps we just have a fundamental disagreement over the purpose of the housing stock we have? To my view it's main purpose is to ensure that everyone has access to affordable and good quality accommodation. Making room for people to profit from the housing stock whilst we have poor quality accommodation, many living in insecure accommodation, people who would, previously, have been able to afford to buy but cannot due to house prices is a bad thing. Pulling policy levers to reverse those trends to my mind is a positive but doesn't necessarily require the Government to say "A house cannot cost more than £x00,000!" or similar.

 

[johncrossley]

7% would have meant longer mortgages, but if buying at 30 then you can have up to 35 years, so it wouldn't have done anything of the sort. Shared ownership also makes it affordable.

Many people buy the most expensive house they can afford. So there must be many people who cannot afford repayments to go much higher than what they pay at the moment.

The fundamental problem is quite simply supply and demand. The population has increased by about 10M over the past 20 years or so, plus more people live alone due to marriage breakdowns etc than used to, but the housing stock hasn't anywhere near kept pace, particularly in the SE.

The population in much of the north, Scotland and Northern Ireland didn't go up much, if at all, for the 10 years leading up to 2008 but their house prices rocketed. You cannot make the demographic argument in those regions so the house price boom was surely more down to sentiment and interest rates rather than demographics. The economy was booming but interest rates were going down! The base rate was 7.5% in 1998, falling to 3.5% by 2003. Then house prices in those regions crashed and didn't recover for many years, despite rock bottom interest rates. They were simply driven beyond realistic values before the crash. House prices are prone to irrational valuations, just like shares.

 

[Giugiaro]

(...) could you save for five years, put down say a 25% deposit and borrow the rest over 25 years? (...)
Then by the time you are 60 you will have paid off the mortgage and maybe able to retire or take a lower paid job.

Incurring in debt is completely out of the question.

 

[TheBigD]

Bought my first house in 1992.
Following black Wednesday (16/09/92) my mortgage rate went up to an eye watering 17.79%. Some of us have had to deal with high interest rates as well as low interest rates.

 

[Bletchleyite]

Many people buy the most expensive house they can afford.

Yes, many people overstretch. But not everyone does, and people still seem to standardise around 25 year mortgages, which gives a little more slack.

There's also a difference between "what would happen if rates were upped to 7% now" and "what would have happened if rates had never gone below 7%". The former more catastrophic than the latter.

Also don't forget that higher rates mean more interest on savings mean saving for a deposit is easier.

 

[Cloud Strife]

Many people buy the most expensive house they can afford. So there must be many people who cannot afford repayments to go much higher than what they pay at the moment.

That's exactly what is happening in Poland. People got very, very greedy, and houses of 200-250m2 are the norm here. It was fine and well when interest rates were below 1%, but now that they're at 6.5%, people are in deep trouble.

I have zero sympathy for them.

 

[Bletchleyite]

Incurring in debt is completely out of the question.

Why? Secured debt for capital purchase is absolutely fine as a thing, for both individuals and Governments.

That's exactly what is happening in Poland. People got very, very greedy, and houses of 200-250m2 are the norm here. It was fine and well when interest rates were below 1%, but now that they're at 6.5%, people are in deep trouble.

I have zero sympathy for them.

FWIW I was actually complimented by the mortgage advisor when I bought, as I was being realistic (looking for a mortgage payment not much more than my rent used to be and sticking to 25 years despite 35 being possible) rather than overstretching, and apparently that was pretty rare.

 

[nlogax]

FWIW I was actually complimented by the mortgage advisor when I bought, as I was being realistic (looking for a mortgage payment not much more than my rent used to be and sticking to 25 years despite 35 being possible) rather than overstretching, and apparently that was pretty rare.

I did similar to you and went against the advice I received from multiple people when I initially bought. That advice was 'buy as expensive a property as you can afford, make it your forever home now if you can'. Utter madness. Not chance in hell was I going to do that while spending a prime part of my life living off noodles and supermarket own-brand cereal.

 

[Bletchleyite]

I did similar to you and went against the advice I received from multiple people when I initially bought. That advice was 'buy as expensive a property as you can afford, make it your forever home now if you can'. Utter madness. Not chance in hell was I going to do that while spending a prime part of my life living off noodles and supermarket own-brand cereal.

That's a bit bizarre, as convention is to buy cheap and small and go up the ladder as you can afford and need (e.g. have kids and need more bedrooms) - that's why it's called a ladder!

A number of my younger friends have bought new and spent a lot more to start with, though, so maybe that's the trend.

Some people do move more frequently than others. For my parents it's 3 houses - first a small bungalow when they first married, then a 1930s 3 bed semi, then a 4 bed detached which they're still in. I'd think that probably fairly average.

 

[yorksrob]

I did similar to you and went against the advice I received from multiple people when I initially bought. That advice was 'buy as expensive a property as you can afford, make it your forever home now if you can'. Utter madness. Not chance in hell was I going to do that while spending a prime part of my life living off noodles and supermarket own-brand cereal.

I don't know where you got that advice, but I heard nothing of the sort. I was told "get something affordable and fix it for as long as possible" (this from my parents who had experienced mortgages through the high days of the late 60's - 80's).

 

[nlogax]

That's a bit bizarre, as convention is to buy cheap and small and go up the ladder as you can afford and need (e.g. have kids and need more bedrooms) - that's why it's called a ladder!

The advice was from homeowners considerably older than me, and I can only assume they were utterly out of touch with the cost of everyday life even when I bought over a decade ago. It's something that's also still touted by the occasional person on MSE forums.

 

[Bletchleyite]

The advice was from homeowners considerably older than me, and I can only assume they were utterly out of touch with the cost of everyday life even when I bought over a decade ago.

Very strange.

It's something that's also still touted by the occasional person on MSE forums.

I'm entirely unconvinced by MSE and its resident tabloid gob Lewis who seems not to live in the real world.

 

[gg1]

I did similar to you and went against the advice I received from multiple people when I initially bought. That advice was 'buy as expensive a property as you can afford, make it your forever home now if you can'.

I don't know where you got that advice, but I heard nothing of the sort. I was told "get something affordable and fix it for as long as possible" (this from my parents who had experienced mortgages through the high days of the late 60's - 80's).

I heard much the same as @nlogax the last time we moved 5 years ago.

I think the logic is that every time you move you lose a not insignificant chunk of cash in EA fees, legal fees and removal costs, plus the hassle and stress of moving.

We went the more affordable route even though we could have easily managed mortgage repayments 30-40% higher.

 

[Bletchleyite]

I think the logic is that every time you move you lose a not insignificant chunk of cash in EA fees, legal fees and removal costs, plus the hassle and stress of moving.

Yes, true, plus you pay the market rate at that time (usually higher) for the difference between the two houses.

However, it's not enough to make overstretching sensible. It's known as a ladder for a reason.

 

[nlogax]

However, it's not enough to make overstretching sensible. It's known as a ladder for a reason.

Current situation means the ladder feels like a thing of the past for most people. Less about the small steps, more about the act of financial parkour needed to get into that first property. Or I suppose there's the Bank of Mum & Dad if you're lucky enough to be in that situation.

 

[gg1]

Yes, true, plus you pay the market rate at that time (usually higher) for the difference between the two houses.

However, it's not enough to make overstretching sensible. It's known as a ladder for a reason.

I completely agree.

Part of the problem is after such a prolonged period of rock bottom interest rates, a significant chunk of buyers had no real concept of how much their mortgage repayment would increase when the inevitable rises eventually came.

 

[JamesT]

I completely agree.

Part of the problem is after such a prolonged period of rock bottom interest rates is a significant chunk of buyers had no real concept of how much their mortgage repayment would increase when the inevitable rises eventually came.

Though it's just been removed, since 2014 mortgage affordability tests have included the rates rising by 3%.

 

[Bletchleyite]

Current situation means the ladder feels like a thing of the past for most people. Less about the small steps, more about the act of financial parkour needed to get into that first property. Or I suppose there's the Bank of Mum & Dad if you're lucky enough to be in that situation.

I do get that, but practically that means you need to go for the cheapest anyway as you can't afford any further up!

I completely agree.

Part of the problem is after such a prolonged period of rock bottom interest rates, a significant chunk of buyers had no real concept of how much their mortgage repayment would increase when the inevitable rises eventually came.

It's mildly annoying that I shortened mine by a few years with higher payments to clear it quicker just before the rates started bumping up and energy went through the roof! To be fair I'm on a tracker (because I may be looking to move in the next year or two, and fixed rates tend to have whacking exit fees), I might be watching out to change it back the way it was if a decent deal is available.

 

[Bald Rick]

Bought my first house at age 25, 95% mortgage (do they still exist?), interest rate at 8% plus that horrible extra default insurance you used to have to buy. The mortgage was twice the rent I was previously paying in a shared house, and I’d saved for a couple of years to get the 5% deposit. Bought st the top end of what I could afford, in a slightly below average suburb of Birmingham.

now, many years later, my mortgage is almost exactly 10 times the size it was then, but with an interest rate of just under 1% I‘m paying only 5 times as much each month. Inflation has effectively halved the value of money in that time, so in real terms my mortgage payments are 2.5 times what they were all the way back then.

 

[Yew]

This isn't conventional inflation which is caused by high demand for products and services, which is controlled by bumping interest rates up a bit so people are encouraged to save instead of spending for a bit.

Interesting how you omit those unable to spend because of rises due to their rent, or the cost of servicing their debts.

I feel the 'race to get your own place' is part of the problem young people have brought on themselves. Forty years ago they'd have lived with parents, paying towards the household bills but saving what they now pay to their landlords in rent. As a result they proved their ability to afford a mortgage to the Building Society and built up a substantial deposit.

40 years ago towns in the north had well paying industrial jobs, now these places compete on which one has the largest poundland. It's not some whim - the jobs have moved out of commuting distance

However, it's not enough to make overstretching sensible. It's known as a ladder for a reason.

Unfortunately, we seem to live in this fantasy world where houses built without parking, nor any reasonable chance of being modified as such are somehow deemed as suitable for people working many modern jobs that de-facto mandate a car.

FWIW I was actually complimented by the mortgage advisor when I bought, as I was being realistic (looking for a mortgage payment not much more than my rent used to be and sticking to 25 years despite 35 being possible) rather than overstretching, and apparently that was pretty rare.

I would gladly pay a mortgage that is not dissimilar to my current rent. Unfortunately such a deal would not be offered without many thousands of pounds in cash - which is somewhat difficult to accrue when paying said rent, and when house prices are at an all-time high.

 

[BluePenguin]

My savings account has gone up to 3% which of course is a good thing. As for loans and other things it is not

 

[Dai Corner]

My savings account has gone up to 3% which of course is a good thing. As for loans and other things it is not

But taking inflation into account you are are paying the bank something in the region of 7% to look after your money and borrowers are being paid to take loans.

 

[plugwash]

That's a bit bizarre, as convention is to buy cheap and small and go up the ladder as you can afford and need (e.g. have kids and need more bedrooms) - that's why it's called a ladder!

I think many people had a feeling that with house prices rocketing out of control if they didn't buy their "forever home" asap they would never be able to afford it (except maybe when their parents died).

 

[Bald Rick]

I think many people had a feeling that with house prices rocketing out of control if they didn't buy their "forever home" asap they would never be able to afford it (except maybe when their parents died).

To be fair, I thought that 20 years ago.

 

[jfollows]

Bought my first house at age 25, 95% mortgage (do they still exist?), interest rate at 8% plus that horrible extra default insurance you used to have to buy. The mortgage was twice the rent I was previously paying in a shared house, and I’d saved for a couple of years to get the 5% deposit. Bought st the top end of what I could afford, in a slightly below average suburb of Birmingham.

now, many years later, my mortgage is almost exactly 10 times the size it was then, but with an interest rate of just under 1% I‘m paying only 5 times as much each month. Inflation has effectively halved the value of money in that time, so in real terms my mortgage payments are 2.5 times what they were all the way back then.

I remember all that - 100% mortgage in 1996 but with the irritating extra life insurance policy. Why? If I died I didn't have anyone else at the time so the place would be sold to pay off the mortgage. After a couple of years the "value" of the property had increased significantly so I remortgaged with a 75% mortgage and no stupid insurance policy. No mortgage today, though, fortunately.