Mortgage struggles

[PNWokingham]

No easy solutions. It is a global issue although UK suffering worse than most as we spent more on covid measures, were less prepared energy wise and import wise, meaning food and other inflation higher. The strikes everywhere are not helping anything although perfectly understandable why they are happening, at least in those industries that are able to do so. Tax rises to combat inflation is a stupid idea as all that will do is exacerbate the problem, lower growth and lead to more higher tax payers moving abroad, lower growth and further problems. How to get out of this is a million-dollar question. Inflation may now be starting to slow and could do so more quickly than people expect but also recession is a real and likely possibility and that may cause more pain than we have have now. A house price correction is underway but impossible to know how far it will go. We are in a mess, 15 years of free money and the resulting asset-price bubble in all areas combined with massive government debt issues, huge fiscal defecits cauesd by covid and now the Ukraine war mean we are in totally unchartered territory and governments have no levers and only issues. Growth is likely the only way out of this but how we get there in the face of the issues is hard to see.

 

[PNWokingham]

It is unfortunately somewhat disingenuous (but perhaps inevitable given forum constraints) to provide a well-reasoned analysis of the situation without mentioning the elephant(s) in the room that makes the UK‘s position different, and in many aspects worse, than that of many other countries affected by both covid and Ukraine.

An addict cannot and will not get fully get into a successful recovery if they do not openly and honestly admit all of their failings, mistakes and shortcomings.

Well not quite sure what you are talking about but would assume a quite naive and maybe one-sided view of the problem that is nothing we can talk about

 

[chrisd]

Nothing to do with the chancellor.

That was taken away by Gordon brown one of the best decisions in history to take power away from government setting rates so banks can act independently from government.

What he can do is raise taxes but then he looks bad and the banks don't.

Brown gives Bank independence to set interest rates

The Chancellor, Gordon Brown, set the seal on a frenetic first 100 hours of activity by the Blair government when he stunned the City and Westminster yesterday by handing control of interest rates to an independent Bank of England.

www.theguardian.com

26 years ago that power went.

Thanks for the economics lesson, but I have lived all through those years and am fully aware that notionally the Bank of England do the governments dirty work for them, but as it's been the way to bring down inflation for years and years and quite clearly the banks profit hugely from borrowing rate increases, I think it's nieve to think that the running of the economy by altering the interest rates is solely the Bank of Englands decision, and not a timely nudge from " The powers that be "

 

[Hobbit]

I’m no expert by any stretch of the imagination but there’s, to me, a few anomalies in who or what is to blame for the CURRENT level of inflation. I don’t dispute that the war in Ukraine caused the initial surge, adding huge costs to supplies of most products and services. Sourcing and supply chains have long since been adjusted to mitigate that.

But when companies are reporting record profits, traced back to inflated pricing, its price gouging that is the issue. The oil companies announced huge profits. Those profits are on the back of fuel cost increases, and it’s fuel that’s used to transport goods to market, ergo the cost of goods go up.

A windfall tax is touted as a good tool to bring in taxes but a company will maintain its dividend to shareholders by increasing its pricing further = more inflation. But a windfall tax + a price cap will put money into the Treasury AND ensure there’s no increase to inflation. The French capped energy prices to their domestic market but the electricity flowing over the channel isn’t price capped. The Spanish have been very creative with capping/subsidising energy and fuel costs. Capping prices obviously restricts the rise in inflation. Cap the rise in inflation and the need for big pay rises is mitigated.

The man in the street has had more disposable income in the last 10 yrs due to low interest rates. That disposable income hasn’t fuelled inflation in those years. Blaming wages is disingenuous. Wage rises are a consequence of inflation, not a reason for it. And capping wage rises is a blunt tool that has some effect but also causes more harm to the people who are suffering from inflation.

Put mechanisms in place to cap energy and fuel pricing and you severely restrict inflationary rises. To achieve that needs a change in ideologies but that’s a discussion for elsewhere.

 

[PJ87]

I’m no expert by any stretch of the imagination but there’s, to me, a few anomalies in who or what is to blame for the CURRENT level of inflation. I don’t dispute that the war in Ukraine caused the initial surge, adding huge costs to supplies of most products and services. Sourcing and supply chains have long since been adjusted to mitigate that.

But when companies are reporting record profits, traced back to inflated pricing, its price gouging that is the issue. The oil companies announced huge profits. Those profits are on the back of fuel cost increases, and it’s fuel that’s used to transport goods to market, ergo the cost of goods go up.

A windfall tax is touted as a good tool to bring in taxes but a company will maintain its dividend to shareholders by increasing its pricing further = more inflation. But a windfall tax + a price cap will put money into the Treasury AND ensure there’s no increase to inflation. The French capped energy prices to their domestic market but the electricity flowing over the channel isn’t price capped. The Spanish have been very creative with capping/subsidising energy and fuel costs. Capping prices obviously restricts the rise in inflation. Cap the rise in inflation and the need for big pay rises is mitigated.

The man in the street has had more disposable income in the last 10 yrs due to low interest rates. That disposable income hasn’t fuelled inflation in those years. Blaming wages is disingenuous. Wage rises are a consequence of inflation, not a reason for it. And capping wage rises is a blunt tool that has some effect but also causes more harm to the people who are suffering from inflation.

Put mechanisms in place to cap energy and fuel pricing and you severely restrict inflationary rises. To achieve that needs a change in ideologies but that’s a discussion for elsewhere.

A very good point about all the extra money over the years

Constant spending on low credit because

Yet inflation has held very low for years

So like you say wages can't be the issue.

For me it's a blame game. They just want the blame shifted away from the real causes which is poor policy

Our energy in UK is ridiculous, renewables don't cost more because of gas but price of electricity rises because the whole sale "must" be linked with gas prices all because of old contracts ..

The gov has said we will unlink them

That was 18 months ago

Absolutely nothing changed

Even tho past few weeks wholesale has been negative

 

[KenL]

A fairer way to deal with inflation is to raise taxes

Affects the poorer in society less

Interest rates affect the poor with rent increases

And the economy is a pyramid scheme linked to house prices

But it's unfashionable to raise taxes.

Not in Scotland, raising taxes is definitely in fashion.

 

[Voyager EMH]

In a capitalist economy, controlling inflation is all about controlling money supply.
The belief being that money supply fuels inflation.
Increasing the cost of borrowing by raising the base rate is a simple way to achieve part of this.
It also protects capital to some extent from a dwindling effect in value during periods of high inflation.

Money. It is all about money. Protecting the money.
If you ain't got much - you won't get much protection - you are not a priority - in periods of high inflation.
In a capitalist economy.

 

[road2ruin]

I cannot see how increasing interest rates will do anything to curb inflation when it's not driven by consumer spending. I only have to look at my own monthly incomings/outgoings to know that we're paying considerably more now than we were 12 months ago once you factor in energy costs, food costs and a rapidly increasing council tax.

On the mortgage front we were always aware that interest rates were only ever going to go one way however we hadn't planned or budgeted for 13 increases in a row and when I sat here last September doing the sums paying a mortgage rate of 6.5% would have meant over £1,200 additional money going out of the house every month which wasn't ideal. We weren't able to look at new deals until May this year so we took the decision to pay the ERC of £11,000 to fix for 7 years at 3%. This wiped out all of our savings although we were in the fortunate position to be able to do it in the first place. At long as interest rates stay at 4% or higher for the duration of the mortgage then we'll get that money back although as much as anything we've bought ourselves 7 years of peace of mind as the increased payments are about £370.

 

[PJ87]

I cannot see how increasing interest rates will do anything to curb inflation when it's not driven by consumer spending. I only have to look at my own monthly incomings/outgoings to know that we're paying considerably more now than we were 12 months ago once you factor in energy costs, food costs and a rapidly increasing council tax.

On the mortgage front we were always aware that interest rates were only ever going to go one way however we hadn't planned or budgeted for 13 increases in a row and when I sat here last September doing the sums paying a mortgage rate of 6.5% would have meant over £1,200 additional money going out of the house every month which wasn't ideal. We weren't able to look at new deals until May this year so we took the decision to pay the ERC of £11,000 to fix for 7 years at 3%. This wiped out all of our savings although we were in the fortunate position to be able to do it in the first place. At long as interest rates stay at 4% or higher for the duration of the mortgage then we'll get that money back although as much as anything we've bought ourselves 7 years of peace of mind as the increased payments are about £370.

Least you have that peace of mind for those 7 years

It always the way if you manage to have a bit aside you can semi protect yourself from these situations of others doing!

If we hadn't fixed for 10 years and done 5 it would be up next year , the energy bills without the outlay I did in the system would be £270 odd a month more to the energy companies

Add those 2 together looking £500 pcm minimum more to find on energy and housing for next 5 years I'm shielded at least

Where as I compare to my mate who's husband and herself are reasonably paid but can't get on housing ladder they are at the Mercy of an awful landlord who is putting rent up whilst not letting them change from a prepaid meter.

 

[jim8flog]

this type of inflation as it hasn't been seen before in the UK

Not alive before us joining the Common Market then?
Not alive pre Thatcher then?

 

[jim8flog]

I was having a discussion on the subject of mortage rates with my daughter the other day and I brought up the fact that I had a mortgage when interest rates reached about 13% from memory.

She argued that the sort of mortgages we had then represented a much smaller % of our income.

I had to disagree with her

Luckily it was only for a short time but it was about 43% then but we did get income tax relief

Doing the sums based upon a £200,000 mortgage (higher than the average) and an average wage of £30K at 5% it is 30% of income

I had told my children they should always budget for interest rate around 8% (this was probably about the average when we bought)

 

[PJ87]

Not alive before us joining the Common Market then?
Not alive pre Thatcher then?

Sorry was this type of inflation IE caused by energy bills around?

 

[road2ruin]

I was having a discussion on the subject of mortage rates with my daughter the other day and I brought up the fact that I had a mortgage when interest rates reached about 13% from memory.

She argued that the sort of mortgages we had then represented a much smaller % of our income.

I had to disagree with her

Luckily it was only for a short time but it was about 43% then but we did get income tax relief

Doing the sums based upon a £200,000 mortgage (higher than the average) and an average wage of £30K at 5% it is 30% of income

I had told my children they should always budget for interest rate around 8% (this was probably about the average when we bought)

Your mortgage might well have been a similar(ish) % to hers however I bet you weren't paying the hideous additional costs such as energy etc? I think for a lot of people the increase in their mortgage would be more doable if their energy hadn't gone up by over 100% and their food etc by 25%. There gets to a point that no more cutting back can be done and people start to skips meals etc to save money.

With regards the argument of interest rates now vs the 80's, an analyst had a look at the numbers and I think 3% today is the equivalent to 12% back then and as we know, we're way past that 3%.

 

[PJ87]

Your mortgage might well have been a similar(ish) % to hers however I bet you weren't paying the hideous additional costs such as energy etc? I think for a lot of people the increase in their mortgage would be more doable if their energy hadn't gone up by over 100% and their food etc by 25%. There gets to a point that no more cutting back can be done and people start to skips meals etc to save money.

With regards the argument of interest rates now vs the 80's, an analyst had a look at the numbers and I think 3% today is the equivalent to 12% back then and as we know, we're way past that 3%.

U can compare the past to now and say it was worse

They have pointed that 4% rates now is higher than anyone paid when you take in inflation and wages etc

I'll dig out the chart later

 

[Hobbit]

Current inflation in Spain is 3.2%. Current variable mortgage rate is 2.8%. And £235k will buy… https://www.colesofandalucia.com/Property/TUR4V04

Inflation at the beginning of the year was 8%.

We’re seeing fruit and veg prices on the market at or close to the prices pre-pandemic. Some meats are still a little high, e.g. lamb, but we bought 4 large pork loin chops for €3.40(£2.90) which if bought in Tesco’s would be €10.30(£8.80). Obviously a 3.2% increase in €3.40 is very different to an 8% increase in £8.80.

Electricity and gas is coming down all the time + we’re seeing at least one free day for electricity a month, but the prices are still relatively high Compared to before the war in Ukraine started. Our elec bill last month was €82.

 

[road2ruin]

U can compare the past to now and say it was worse

They have pointed that 4% rates now is higher than anyone paid when you take in inflation and wages etc

I'll dig out the chart later

This is the thread I was referencing.....

https://twitter.com/x/status/1572975530722627584

"So for instance, take 1980. Back then, official BoE interest rates were on average 14.2%.But because people were much less heavily indebted, because their incomes were much higher vs their repayments, that was, in affordability terms, EQUIVALENT to 3% in today’s interest rates."

 

[Bdill93]

4 years into a 5 year fixed rate mortgage and we now have a little one to fund too...

Bit worried what we may face paying per month when we remortgage next year to be honest - but ill fix for shorter terms and just try and ride out the wave if possible.

Only positive is that childcare for Under 3's becomes free in September 2024 so some cash will be freed up then, but from June to September I expect it'll be tight!

 

[SwingsitlikeHogan]

I was having a discussion on the subject of mortage rates with my daughter the other day and I brought up the fact that I had a mortgage when interest rates reached about 13% from memory.

She argued that the sort of mortgages we had then represented a much smaller % of our income.

I had to disagree with her

Luckily it was only for a short time but it was about 43% then but we did get income tax relief

Doing the sums based upon a £200,000 mortgage (higher than the average) and an average wage of £30K at 5% it is 30% of income

I had told my children they should always budget for interest rate around 8% (this was probably about the average when we bought)

I struggle with this analysis (not saying it’s wrong given it’s your lived experience) as I can’t see how it applied to me back then. I bought my flat in 1986 for £35k. My salary was just over £10k. I had saved a little bit and borrowed a bit from Bank of MaD for a 10% deposit of £3.5k. My mortgage was 3x my income. When interest rates rocketed I had loads of room in my disposable income to accommodate the increased monthly payment - though it did cut very deep into it. And the 13-15% rate (whatever it reached for me) was a very brief peak, and they soon dropped.

Today it feels to me that the average more recent mortgage holder has a mortgage that leaves little disposable income once mortgage, power and basics are paid. I suspect that the stress testing of applications given increased interest rates assumed a higher rate would be reached over a few years and assumed that the applicants income would have grown sufficient over that time to accommodate all but the very worst outlier rates. Plus it would not have assumed an increased cost of living (power, food, fuel etc) of anything like what we have experienced.

Strikes me that that the stress testing assumptions have not held.

 

[Maninblack4612]

Anyone borrowing heavily at a very low rate was taking a risk, given the fluctuating nature of interest rates. Would it be a good idea to oblige lenders to fix the monthly repayment amount (not the interest rate) for the entire duration of the mortgage? This would have the effect of protecting borrowers from rising rates, while the risk posed to the lender would encourage less reckless lending. This would also have the effect of curbing property price rises, fuelled by low interest rates. In reality 6% is not terribly high. Like many others, I remember the days of a 15% interest rate, but I was lucky enough to be working for a bank at the time & enjoyed a subsidised rate.

 

[jim8flog]

I struggle with this analysis (not saying it’s wrong given it’s your lived experience) as I can’t see how it applied to me back then. I bought my flat in 1986 for £35k. My salary was just over £10k. I had saved a little bit and borrowed a bit from Bank of MaD for a 10% deposit of £3.5k. My mortgage was 3x my income. When interest rates rocketed I had loads of room in my disposable income to accommodate the increased monthly payment - though it did cut very deep into it. And the 13-15% rate (whatever it reached for me) was a very brief peak, and they soon dropped.

Today it feels to me that the average more recent mortgage holder has a mortgage that leaves little disposable income once mortgage, power and basics are paid. I suspect that the stress testing of applications given increased interest rates assumed a higher rate would be reached over a few years and assumed that the applicants income would have grown sufficient over that time to accommodate all but the very worst outlier rates. Plus it would not have assumed an increased cost of living (power, food, fuel etc) of anything like what we have experienced.

Strikes me that that the stress testing assumptions have not held.

I was remembering the big (agreeably short) hike in interest rates around 1980/1. My income was only £5-6k then

It made wife and I seriously concerned as we had only just moved house and increased our mortgage to around £20k. It did delay us deciding to have children as we could not have lived one salary alone then.