Mortgage rate cliff edge approaches

[vand]

There are 2 classes of financial wellbeing in the UK - those who locked in their mortgages deals before 2023 and those who didn't....

The 3 years are almost up on our initial mortgage deal when we moved to our current abode, and... well, lets just say the coming renewal is going to hit our finances in a massive way.

With the benefit of hindsight the 3yr deal we chose appears to have been the worse choice choice we could have made, as we are due to come off it right at the peak of current interest rates - choosing a 2yr or 5yr deal would have likely worked out much better. Of course, we couldn't have known that at the time, and the challenge now is a basic budgeting one and how to get through the next year or burdened with having to service a the debt on a huge mortgage until mortgage rates become more palatable and/or everyone else finds themselves in the same boat.

175k gross income
220k likely total, inc bonuses, pensions & other incomes


Currently managing to save about 100k/yr, and net take-home is about 8k/month

- £1212/month towards servicing a 582k mortgage, which is 2/3rds interest-only, and 1/3 repayment, both parts @ 1.4%
- Additionally put in £2400 into our ISAs, which acts as both a repayment vehicle for the house and a bridging pot to the pensions
- £1200/pm household bills/food
- £1000/pm childcare
- £600/pm BTL mortgage/upkeep

leaves us approx £1600/month for everyday spending from our steady monthly income.

If I pencil in a 7% mortgage rate that is going to be £40k/yr, or £3400/pm just on the mortgage interest alone.. ouch.  I mean, I guess this is roughly the amount we would be paying if we rented our home on the open market. however we have about 40% equity in there - which just shows how out of whack house prices are compared to the discount rates.

What's our plan?  frankly, I see little merit in trying to lock any sort of a long term deal in at these rates, as I do feel that we are near a peak in rates and that inflation will fall off over the next 6-12 months, and next year it seems unfathomable that rates will be held at these levels with election cycles coming up on both sides of the atlantic, and more and more people come off their cheap mortgages. That in mind, we may just go for a 1yr deal and reassess next year, or even just suck it up and pay whatever SVR.   

Our savings rate will of course take a significant hit.. maybe it goes from 50% to 30% for a few years. That's still healthy and doesn't completely derail our plans, but probably adds at least 2-3 years on.   

The thing is, granted, although we do have a large mortgage, that was always our plan and we live well within our means - other households who don't have the same sort of financial buffers we do are going to be in much bigger trouble unless mortgage rates drop pdq.

[vand]

The difficult thing is that it becomes a tax efficiency problem too - to gain another £1000 to help with meeting the budget we'd need cut our pension contributions, so that becomes £1700 that we need to forego in pension contributions just to get the £1000 to pay the high mortgage costs.   So the savings rate would fall even more precipitously as the HRMC takes a considerable slice... really hoping we don't have to do that!

[scottish]

I’ll just comment that interest rates aren’t high by historical standards right now.

Lots of people seem to be convinced that rates will head back down soon, but there isn’t much basis for this.   They could go either way.

[former player]

It's a hit, yes, but as you say you've got the space given that very nice income figure.

If £1200 a month is spent on food and houshold bills what does £1600 a month on "everyday spending" mean?  A good look at the extent to which spending £2,800 a month on consumables enhances your lives might be in order.

Is your BTL making you money that is included in your income stream?  If not, selling it seems sensible - a lot of landlords are selling up now that mortgage rates are up and regulations on letting are getting tougher.

[vand]

I’ll just comment that interest rates aren’t high by historical standards right now.

Lots of people seem to be convinced that rates will head back down soon, but there isn’t much basis for this.   They could go either way.

I agree there are no guarantees and they could go higher yet... but imo it would take a further external shock which I deem highly unlikely. We seem to be past the inflation peak, and just as the UK lagged everyone else on the way up, it seems to be taking longer to come down too. 

It's true that rates are not particularly high in comparison to the historical average, but they ARE high - very high - compared to the most recent past, which is the most important data.  History has shown that:

- rate changes take time to filter through the the wider economy
- central banks usually underestimate the lag and overdo it both on the way up and the way down

The money supply has been shrinking for the last year, and at the current level of base rates I think most people feel that we are above a neutral rate already.. the bankers just have to jawbone about fighting inflation and keeping rates higher for longer, just as they did "low as possible for as long as possible" when that was the desired narrative.

Realise I may be talking my book somewhat, too, so a reasonable contrary viewpoint is always welcome.

[PhilB]

At the risk of depressing you, there is more than one way for mortgages to become more affordable - for new buyers at least.  Yes interest rates may return to historically low values, but equally they may stay 'high' and house prices may return to a more historically 'normal' multiple of wages.  Were I a betting man I'd be guessing something in the middle.

I'm old enough to remember when house prices weren't a one way bet.

[vand]

At the risk of depressing you, there is more than one way for mortgages to become more affordable - for new buyers at least.  Yes interest rates may return to historically low values, but equally they may stay 'high' and house prices may return to a more historically 'normal' multiple of wages.  Were I a betting man I'd be guessing something in the middle.

I'm old enough to remember when house prices weren't a one way bet.

Personally as we're in our "forever home" I'd be pretty happy if prices decline further - it would make housing more affordable to everyone.  Prices declined by 40% in real terms between 1989-1996, and I it wouldn't surprise me if something similar happened this time, especially as we have the similar drivers of a surge in inflation coupled with a sharp increase in lending rates.

IMO it would do the country an immense amount of good if it could move on from its obsession with house prices, and everyone did something more constructive - at least for a few years.

[PhilB]

At the risk of depressing you, there is more than one way for mortgages to become more affordable - for new buyers at least.  Yes interest rates may return to historically low values, but equally they may stay 'high' and house prices may return to a more historically 'normal' multiple of wages.  Were I a betting man I'd be guessing something in the middle.

I'm old enough to remember when house prices weren't a one way bet.

Personally as we're in our "forever home" I'd be pretty happy if prices decline further - it would make housing more affordable to everyone.  Prices declined by 40% in real terms between 1989-1996, and I it wouldn't surprise me if something similar happened this time, especially as we have the similar drivers of a surge in inflation coupled with a sharp increase in lending rates.

IMO it would do the country an immense amount of good if it could move on from its obsession with house prices, and everyone did something more constructive - at least for a few years.

Hear! hear!

[Manchester]

At the risk of depressing you, there is more than one way for mortgages to become more affordable - for new buyers at least.  Yes interest rates may return to historically low values, but equally they may stay 'high' and house prices may return to a more historically 'normal' multiple of wages.  Were I a betting man I'd be guessing something in the middle.

I'm old enough to remember when house prices weren't a one way bet.

I'd have more hope in a 'housing market reset' if we were building houses to keep up with demand.  We aren't, and therefore the supply/demand basic economics dictate it's unlikely to change any time soon.  I think the house prices will stall for the foreseeable, and that it's unlikely they'll be in either direction for a few years.

[SuseB]

One thing that we are chewing over - although the sums involved couldn't be more different (we only have £65k left on our mortgage but are also coming to the end of a cheap 5-year fix) is using some of our S&S ISA funds to pay down the mortgage to offset the coming increase in repayments/interest rate. We could even pay the mortgage off completely from ISA funds and not clean ourselves out - and with no ERC because our mortgage is ending. I know all about the DPOYM discussion but seems to me it's more marginal if we are looking at rates of eg 7% on the mortgage. If we did this it would mean we could pay off the (now more expensive) mortgage quicker and divert those funds back into our ISAs within a 5 year time frame. However, if we can get a new 5 yr fix closer to 4.5 or 5% when the time comes (next April) then we will probably just take the hit on the repayments and keep paying it off at the same rate.

[ChpBstrd]

I'm very uncomfortable with any plan that involves "we'll be fine AS LONG AS rates decrease".

The 2200 pound per month increase in your mortgage could easily become a permanent thing if long term rates eventually rise to meet short term rates, or if the spreads between mortgages and risk-free rates increases. The former could happen if there is a relatively soft landing rather than the sort of crisis that resets everything and requires emergency rate cuts. The later could happen if defaults rise dramatically, which one might expect to happen as other people's house payments do what yours has done.

I don't know much about the UK home loan scene, but in this situation I recommend looking at getting an interest-only loan with prepayment options, if such a thing exists. This will minimize your mandatory payments, which will slow the bleeding in case your income and investments get cut at some point in the future. Second, you should increase your emergency fund so that you can make the higher payments for several months if a financial emergency occurs. Third, you should probably stop contributing to your ISA and instead plow those funds toward mortgage principal, because the opportunity to "earn" 7% with zero risk should not be passed up. Yes, this will cost you something in taxes, but until risk-free 7% opportunities appear in your ISA it's probably worth it.

I think this plan will work well in any of the following future scenarios:

1) Stubborn re-occurring inflation and permanently higher rates (because you're paying down principal),
2) A deflationary crisis in which rates fall but your investments and potentially income get cut badly (because you picked the option with the lowest available monthly payment), or
3) A slow "soft landing" in which rates do not fall significantly for the next 2-3 years, and then only get cut a percent or two over the following couple of years.

And if your expected outcome occurs and rates are much lower a year or two from now, you're fine anyway.

Overall though, this example makes me think harder about housing markets in Europe, the UK, and Canada. The US is sort of floating through the rapids on the strength of all the people with 30y loans at 4% or no mortgage at all. But how many households in other places can handle payment increases on the scale discussed here? What if it's 2007 all over again, but the epicenter is outside of the US this time?

[Affable Bear]

Overall though, this example makes me think harder about housing markets in Europe, the UK, and Canada. The US is sort of floating through the rapids on the strength of all the people with 30y loans at 4% or no mortgage at all. But how many households in other places can handle payment increases on the scale discussed here? What if it's 2007 all over again, but the epicenter is outside of the US this time?

I must admit I am peeved that the UK doesnt offer 30 year fixed rates, surely we would have learnt from all those teaser rates in the US (although only half the problem) in that when rates spike up hard people get caught sideways. The other scary thing is for the last 13 years we have had incredibly cheap borrowing combined with ludicrous house price growth meaning there are a lot of recent home owners who have borrowed a lot and don't realise how exposed they are to rate rises. Unfortunately there does seem to be a lot of people where paycheck to paycheck is seen as the norm and I can see these people hurting the most.

There has been a lot of debate about not paying your mortgage off early over the last decade and this is mostly because the rates were so incredibly low but I think when mortgage rates start hitting 4%+ the argument melts away really in my opinion. Yes you could probably still make more but at the end of the day the difference is neglible and lets face it have you ever met somebody with a paid off house that is unhappy?

Personally if I were in this situation I would pay down the mortgage balances as quickly as I can without hitting any overpayment charges. At the end of the day if you love leverage so much if rates did ever go back down to 1-2% you can simply refinance and get the capital back out and as fixed deals can be as short as 2 years you can do this very easily without penalty, there is also no tax on the money you borrow against an asset as its a loan not income. If the rates dont ever come back down then you get a guarenteed 5-7% return from paying the mortgage down, reduce your risk and increase your cashflow over time by having a smaller mortgage. Kind of a win win from my view anyways!

[ChpBstrd]

Overall though, this example makes me think harder about housing markets in Europe, the UK, and Canada. The US is sort of floating through the rapids on the strength of all the people with 30y loans at 4% or no mortgage at all. But how many households in other places can handle payment increases on the scale discussed here? What if it's 2007 all over again, but the epicenter is outside of the US this time?

I must admit I am peeved that the UK doesnt offer 30 year fixed rates, surely we would have learnt from all those teaser rates in the US (although only half the problem) in that when rates spike up hard people get caught sideways. The other scary thing is for the last 13 years we have had incredibly cheap borrowing combined with ludicrous house price growth meaning there are a lot of recent home owners who have borrowed a lot and don't realise how exposed they are to rate rises. Unfortunately there does seem to be a lot of people where paycheck to paycheck is seen as the norm and I can see these people hurting the most.

There has been a lot of debate about not paying your mortgage off early over the last decade and this is mostly because the rates were so incredibly low but I think when mortgage rates start hitting 4%+ the argument melts away really in my opinion. Yes you could probably still make more but at the end of the day the difference is neglible and lets face it have you ever met somebody with a paid off house that is unhappy?

Personally if I were in this situation I would pay down the mortgage balances as quickly as I can without hitting any overpayment charges. At the end of the day if you love leverage so much if rates did ever go back down to 1-2% you can simply refinance and get the capital back out and as fixed deals can be as short as 2 years you can do this very easily without penalty, there is also no tax on the money you borrow against an asset as its a loan not income. If the rates dont ever come back down then you get a guarenteed 5-7% return from paying the mortgage down, reduce your risk and increase your cashflow over time by having a smaller mortgage. Kind of a win win from my view anyways!

This is all very logical. It's what I would do.

Now what happens when everybody starts plowing money into paying down their mortgages instead of... say... investing in paper assets, holding cash in the bank, or spending the money on consumer stuff? The answers are: reduced demand for investment assets, reduced bank deposits and weakening banks, and a reduction in aggregate demand.

It's already happening. Apple just reported its 3rd consecutive quarter of declining sales. The US S&P500 has reported declining earnings for a year. Banks in the US are being propped up by government loans which account for the value of their collateral at par value instead of actual value. I can only imagine the situation in the EU, UK, Canada, Australia, South Korea, etc. where I am less familiar with the relevant data points and sources.

As more time passes, more and more people in the UK and elsewhere reach the end of their existing loan terms and enter this mode where they must logically act house-poor. Even in the US, people are having to give up their 4% 30y mortgages when they divorce, when estates must be settled, after disasters, when they need to downsize/up-size, or due to job changes. These transactions ratchet more and more people up to 7% rates, and they're starting to lose faith that rates will return to the good ole days. Whether this rolling snowball of house poverty becomes an avalanche depends on how long this situation persists.

Rates cannot be cut until consumer demand and investment bubbles come down, so now we are waiting for a recession before we can receive the rate cuts that could resolve the house poverty that will lead to the recession.

[scottish]

That’s pretty much it. As long as people have the belief that interest rates are just high for a temporary period they re going to keep borrowing which creates more upwards price pressure.

I regularly see articles on houses that sell for 200k CAD over asking and I just shake my head

[vand]

The BoE froze rates at 5.25% after 14 consecutive rises...  I am pretty confident that we've seen the last increase and the next move will be down as the economy starts to feels the effect of the previous rises over the next 1-2 years and the rapid inflation of 2022 fully rolls out of the annual figures.

We have gone for a 2yr tracker, 0.36% above base rate.  Happy to take any further upside risk as my base case scenario is that rates will start to come down over the next couple of years.

[Panly]

since TS saves 100k GBP a year and  there have passed 3 years since the mortgage started.  Hence there's at least 300k GBP to repay over half of the outstanding mortgage.
 
What's the problem? 

[vand]

since TS saves 100k GBP a year and  there have passed 3 years since the mortgage started.  Hence there's at least 300k GBP to repay over half of the outstanding mortgage.
 
What's the problem?

To be able to channel it towards immediate mortgage payments we'd need to redirect it from our pensions where we pay 0% marginal rate, and instead pay about 45% marginal rate of tax on it... in order to earn 5.5%. Poor payoff imo.

Mortgage rates are coming down.. eventually. Market has priced in 6 or so 150 or 175 basis points cuts next year in the US - I'd fully expect the BoE to follow suit, so very happy with my tracker decision. Happy to still be channelling my money towards investments rather than debt repayment - that was always my strategy and I keep hearing about the importance of sticking to your long term strategy...

By the 2nd half of next year nearly the <2% covid mortgages will have rolled over and the BoE's work will be (over)done

https://www.statista.com/statistics/1399875/fixed-mortgages-for-renewal-by-interest-rate-uk/

[Must_ache]

The US S&P500 has reported declining earnings for a year.

Technically they tumbled the last 6-9 months of 2022, and have since gone up each of the first six months in 2023. 
Still 8.4% off the December 2021 high, however.