Interest rates and Inflation

AS I remember from the early 60s until 2008 mortgage rates traditionally ran at about 8% there were of course blips along the way.



for me the big issue is the millennials with mortgages at 1 or 2 percent and a loan of  £500000, at 1 percent they are paying £5K a year in interest at 2% £10K , if it goes back to say 6% how many will be able to afford £30K a year to pay interest plus £20k in repayments. It would of course also badly affect the BTL Market. I have a friend in London who has a portfolio of 15 properties that makes him a comfortable income after tax, mortgage payments etc, he only owns his own and one other outright the others are heavily mortgaged, if his mortgages per property go by even 2% he would be losing money.

But then back in 81 I borrowed £19,000, on an 8K salary and was told I'd be bankrupt within 2 years by borrowing more than twice my income.

keitha, that is exactly what I am worried about as well. It is not just millennials but also many people who have remortgaged to buy properties that were overpriced because the of an overheated property market driven by low interest rates. BTL mortgages are stressed tested against higher rates but a 2% rise in interest rates could make life a lot harder for a lot of people who at best will be forced to significantly reduce their spending. That is likely to have a knock on effect to the wider economy.


However, it very much depends on which side you take. Correctly me if I am wrong, but if you first bought in ’81, was that not in the middle of a housing crash? I am not surprised people were telling you were mad; it is the perfect example of contrarian purchasing that Warren Buffet like to talk about. I am guessing you did quite well by buying at the bottom of the market.


I think a lot of millennials that have been sensible and saved for the last few years could also benefit from a fall in house prices. They are struggling to raise a deposit that will allow them to get a 4.5x salary mortgage but that could well change if rates keep on going this way. Going to be interesting.

You could work out what would need to happen to make property a less good deal.  I guess the making the holding of residential property in a company would drop the price pretty fast.  Similarly limit numbers of properties ownable by individuals or by foreign individuals.  I don't think anyone is going to go for that sort of legislation so Property is a good bet.

I agree about the way the goverment uses financial repression to take money off taxpayers but devaluation of debt doesnt work at that level because the lenders are the major financial institutions that just ramp up the price the government has to pay to borrow. 

I agree about cash but it is bad at all times, just worse with inflation and shares.  Debt is as good as the security which in a rocky market is harder to calculate. 

tallsuk

In my case people thought 2.5 times income was high, but I remember 2 years later a colleague borrowing £2.5K to refurbish his Kitchen that was the same amount he had outstanding on his Mortgage.

In my case the property sold 10 years later for 3 times what I paid, and I've seen property on the same street selling now for 12-15 times what I paid.

I honestly believe property prices are getting ridiculous.

In Late 2017 I purchased this property for £61,000, I've spent a little over £14,000 on a new boiler, New front door, creating an upstairs bathroom, and solar panels
the latest online valuation is £105,000 not taking the improvements into account. A similar property sold for£108,000 recently and it was a 2 bed 1 bathroom, rather than 2 bed 2 bathroom.
What galls me is the rental prices here, a properties like mine are renting for over £500 a month, I could buy at under £400 a month

keitha

I completely agree with you about the property market at the moment. It is clearly running out of control. I live in the SE so a 1 bed in a reasonable area on the outskirts of London is still £300-400k. 

However, comparing a monthly mortgage repayment to a rent cheque is not a true comparison. In addition to the maintence of a property there is alo the cost of debt, the interest the homeowner has to pay on top of repaying borrowed capital as well as the cost of equity, having cash tied up in the property that can be reinvested for profit elsewhere. Renting and buying tend to cost people similar amounts. The capital gains from homeownership tend to match the returns that could be made investing the capital in the financial markets. 

Individuals should make the decision on other factors. Many people want a place to call their own home, whilst others enjoy the freedom that renting offers. 

Buy to let can be a profitable business but the changes in legislation mean that they have to be sensible and take a professional approach. The margins now mean that just buying somewhere as an investment does not work anymore although it may take a real crash to shake out many of the accidental landlords who are still not aware of the changes. 

Agree with that which is part of the reason I'll not be renting out our family home whilst I'm away for a few years. Seems to make more sense to sell and immediately buy 1 smaller property in the UK for rental and more abroad where the yields are higher.