Mortgage Mayhem
September 10, 2008 8:20 AM Subscribe
Mortgages, interest rates, inflation, recession (UK-specific)... what to do?
So the discounted period of my mortgage will be up at the end of October, and I'll no longer be tied in. It was a fixed rate mortgage and the interest rate was somewhat lower than I can expect to get with any current offering.
My question is this: what is the most likely trend for interest rates over the next couple of years? The Bank of England, from my limited understanding, would like to keep rates steady to control inflation. Elsewhere there seems to be a belief that rates will have to fall significantly over the next year or so.
Which leaves me wondering whether I should opt for a fixed rate or one that tracks the base rate. How likely is an increase in interest rate over the next two years?
Any fiscally-minded MeFites want to express an opinion or offer advice?
So the discounted period of my mortgage will be up at the end of October, and I'll no longer be tied in. It was a fixed rate mortgage and the interest rate was somewhat lower than I can expect to get with any current offering.
My question is this: what is the most likely trend for interest rates over the next couple of years? The Bank of England, from my limited understanding, would like to keep rates steady to control inflation. Elsewhere there seems to be a belief that rates will have to fall significantly over the next year or so.
Which leaves me wondering whether I should opt for a fixed rate or one that tracks the base rate. How likely is an increase in interest rate over the next two years?
Any fiscally-minded MeFites want to express an opinion or offer advice?
Best answer: Hey we're in pretty much the same position - my fixed rate is ending in October, and I've already been engaging mortgage providers to see what's on offer. I don't know your specifics, but I'll share some of mine, but nobody is coming close to matching my 4.99% fixed rate.
So why not I tell you how I'm planning to play it, and if this helps - grand!!
First of all, you simply DO NOT want to bet on interest rates. At all. And that's what you're doing by taking out any one of the floaters or discounted floaters on offer. Avoid.
Myself, I'm locking in a five year fixed rate, INTEREST ONLY mortgage with minimal penalities for prepayment (5% year 0, 4% year 1 and so on ...). I realise our circumstances are probably different, but I bought my place in London's East End (Zone 2, postal code E1) in late 2001, and have aggressively paid down principal since. I only owe so little that by switching fixed rate mortgages, from amortizing to interest only my monthly payment will decrease from £489 to £314.
I view this as a positive, as Mrs Mutant (we got married last September) isn't thrilled about the Urban Blight one sees in E1, and I'm not too keen on the gentrification (we just got our first Tesco Express AND a Starbucks). I don't want to sell as with three Universities and a huge teaching hospital nearby, I can always let the place.
In terms of interest rates, here's my view.
England, and most of the G7, have some near term problems. Inflation is surging and while the primary drivers seem to be receding somewhat, there is still inflationary shocks (i.e., higher prices) that have entered the system and have to be passed along to consumers. At the same time there are enormous deficits that will remain in place. Somethings gotta give.
ECB is in a tightening bias, and many Developing Nations are well into the interest rate hiking part of the credit cycle. Its only a matter of time before the UK - and the US for that matter - follow suit.
Short answer: we very well may see a short term cut in rates, however when they snap back they will, markedly. And nobody can predict when either the cut or the increase will take place. Finally, I wouldn't rule out a return to double digit interest rates, should UK inflation not recede on its own. High rates may not be in place for a lengthy period of time, but as yourself how a rate of 18% or so would impact your monthly payments, should you take out floating rate debt.
Keep in mind that with RPI running at 5% CPI at 4.4%, and the UK government required to keep inflation at 2% or lower, there is really only one, demonstrative way for them to regain control. In the short term we might see a cut to reinvigorate the housing market and hopefully stave off recession, but when that threat has receded watch out.
I'm a student of The History of Finance, and always advise folks to look back at how things played out in the past, to gain insight into what might happen in the future. In the 70's we saw so many parallels to today it's downright uncanny. Surging commodity prices, weakening economy, rising unemployment, enormous deficits and a wealth destroying inflation.
How were interest rates managed back then to control inflation?
I'd be very, very careful about taking on floating rate debt, no matter how attractive the deal.
At least with a fixed rate mortgage you'll know what your obligations are each and every month for the term of your loan.
Hope this helps! Don't hesitate to MeMail or comment in thread if I can help further.
posted by Mutant at 9:01 AM on September 10, 2008 [2 favorites]
So why not I tell you how I'm planning to play it, and if this helps - grand!!
First of all, you simply DO NOT want to bet on interest rates. At all. And that's what you're doing by taking out any one of the floaters or discounted floaters on offer. Avoid.
Myself, I'm locking in a five year fixed rate, INTEREST ONLY mortgage with minimal penalities for prepayment (5% year 0, 4% year 1 and so on ...). I realise our circumstances are probably different, but I bought my place in London's East End (Zone 2, postal code E1) in late 2001, and have aggressively paid down principal since. I only owe so little that by switching fixed rate mortgages, from amortizing to interest only my monthly payment will decrease from £489 to £314.
I view this as a positive, as Mrs Mutant (we got married last September) isn't thrilled about the Urban Blight one sees in E1, and I'm not too keen on the gentrification (we just got our first Tesco Express AND a Starbucks). I don't want to sell as with three Universities and a huge teaching hospital nearby, I can always let the place.
In terms of interest rates, here's my view.
England, and most of the G7, have some near term problems. Inflation is surging and while the primary drivers seem to be receding somewhat, there is still inflationary shocks (i.e., higher prices) that have entered the system and have to be passed along to consumers. At the same time there are enormous deficits that will remain in place. Somethings gotta give.
ECB is in a tightening bias, and many Developing Nations are well into the interest rate hiking part of the credit cycle. Its only a matter of time before the UK - and the US for that matter - follow suit.
Short answer: we very well may see a short term cut in rates, however when they snap back they will, markedly. And nobody can predict when either the cut or the increase will take place. Finally, I wouldn't rule out a return to double digit interest rates, should UK inflation not recede on its own. High rates may not be in place for a lengthy period of time, but as yourself how a rate of 18% or so would impact your monthly payments, should you take out floating rate debt.
Keep in mind that with RPI running at 5% CPI at 4.4%, and the UK government required to keep inflation at 2% or lower, there is really only one, demonstrative way for them to regain control. In the short term we might see a cut to reinvigorate the housing market and hopefully stave off recession, but when that threat has receded watch out.
I'm a student of The History of Finance, and always advise folks to look back at how things played out in the past, to gain insight into what might happen in the future. In the 70's we saw so many parallels to today it's downright uncanny. Surging commodity prices, weakening economy, rising unemployment, enormous deficits and a wealth destroying inflation.
How were interest rates managed back then to control inflation?
I'd be very, very careful about taking on floating rate debt, no matter how attractive the deal.
At least with a fixed rate mortgage you'll know what your obligations are each and every month for the term of your loan.
Hope this helps! Don't hesitate to MeMail or comment in thread if I can help further.
posted by Mutant at 9:01 AM on September 10, 2008 [2 favorites]
You also can't just look at what the Bank of England is going to do to the base rate, as the mortgage banks are not necessarily passing on any savings, and in some cases had to raise rates to pass on their own losses.
One way you could look at it, is rather than trying to predict what will happen, is see how easily you can afford the fixed rates on offer. You then get the considerable comfort of knowing that you should always be able to afford the payments (barring changes in personal circumstances which would be a problem however you play it) and if interest rates drop you haven't actually "lost" anything, you've just missed out on a hypothetical saving. Better that than being exposed to a very real cost if interest rates increase.
Of course, if you struggle to afford the fixed rates then it's a more difficult decision.
posted by Mattat at 9:50 AM on September 10, 2008
One way you could look at it, is rather than trying to predict what will happen, is see how easily you can afford the fixed rates on offer. You then get the considerable comfort of knowing that you should always be able to afford the payments (barring changes in personal circumstances which would be a problem however you play it) and if interest rates drop you haven't actually "lost" anything, you've just missed out on a hypothetical saving. Better that than being exposed to a very real cost if interest rates increase.
Of course, if you struggle to afford the fixed rates then it's a more difficult decision.
posted by Mattat at 9:50 AM on September 10, 2008
FWIW, an interest-only mortgage is only worth having if you have some kind of repayment vehicle (such as an endowment, unit trust or other investment that's intended to grow over the years) to discharge the outstanding debt at the end of the term, or if you can be absolutely sure that you'll have the capital available to pay off your mortgage at the end of the term. If not, you'll have to raise the money somewhere else or sell the property.
If you can afford it, go for a capital and interest repayment mortgage, but fix the interest rate for the next few years. As Mutant says, tracking Base Rate is somewhat of a risk. Although rates are stable for the time being I still remember Black Wednesday, 16 September 1992, when rates went up from 10% to 12% to 15%, then back to 12% in a single day. I'd have hoped that lessons were learned from that time, but there's no guarantee.
posted by essexjan at 9:55 AM on September 10, 2008
If you can afford it, go for a capital and interest repayment mortgage, but fix the interest rate for the next few years. As Mutant says, tracking Base Rate is somewhat of a risk. Although rates are stable for the time being I still remember Black Wednesday, 16 September 1992, when rates went up from 10% to 12% to 15%, then back to 12% in a single day. I'd have hoped that lessons were learned from that time, but there's no guarantee.
posted by essexjan at 9:55 AM on September 10, 2008
I'm in a similar situation, as my 2-year fixed rate or 4.97% (sigh!) with Nationwide is ending in December. We (mr alto and me) are going to go for another fixed rate deal if we can possibly swing it - our reasoning is that, while fixed rates rose quite a lot last year, they have stabilised as of the middle of this year, and are now back to where they were over a year ago. As the UK seems set to stay economically unstable for a while, and as commodity prices are still rising, it's highly likely that rates will have to rise again in order to control inflation.
Talk to your lender now - you might be able to reserve a reasonable rate now for a renewed mortgage starting in October (not sure about this last part though).
posted by altolinguistic at 9:56 AM on September 10, 2008
Talk to your lender now - you might be able to reserve a reasonable rate now for a renewed mortgage starting in October (not sure about this last part though).
posted by altolinguistic at 9:56 AM on September 10, 2008
Response by poster: Thanks all, especially Mutant. I was already starting to sway in the direction of a fixed rate, and you've supplied some good reasons to take that route; I had been thinking of a shortish term (2 years), but on the basis of points you and others have raised I may look at a 5 year term if the setup fees aren't exhorbitant.
Altolinguistic, you're in exactly the sane situation as me and mrs morte... same rate, same lender, same term. If I find a good deal I'll try to remember to let you know.
posted by le morte de bea arthur at 2:57 PM on September 10, 2008
Altolinguistic, you're in exactly the sane situation as me and mrs morte... same rate, same lender, same term. If I find a good deal I'll try to remember to let you know.
posted by le morte de bea arthur at 2:57 PM on September 10, 2008
Looking back, six months later: we did go for the fix, 5 years at 5.78% (meaning that our monthly repayment went up from £718 to £772), and then straight away rates tumbled :(.
We are mostly fine about it, despite the occasional pang of regret and envy of our friends who are fixing their mortgages now; we still have a mortgage we can afford (and can overpay chunks from time to time), we know our payments will stay the same until 2013, and have still never paid a mortgage arrangement fee.
posted by altolinguistic at 7:30 AM on April 1, 2009
We are mostly fine about it, despite the occasional pang of regret and envy of our friends who are fixing their mortgages now; we still have a mortgage we can afford (and can overpay chunks from time to time), we know our payments will stay the same until 2013, and have still never paid a mortgage arrangement fee.
posted by altolinguistic at 7:30 AM on April 1, 2009
This thread is closed to new comments.
posted by dowcrag at 8:59 AM on September 10, 2008