Interest rates

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El Pollo Diablo
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Interest rates

Post by El Pollo Diablo » Mon Jun 06, 2022 2:59 pm

Mrs PD and I are considering moving house this year, and looking at available mortgages, discounted variable rate mortgages are currently quite a bit cheaper than fixed (the best for our circumstances is 1.49% initial rate for two years variable versus 2.44% five years fixed).

Longer fixies are cheaper than shorter ones right now, which I'm guessing suggests the market is gambling that rates will drop in 2-5 years' time, so it's best to be able to get out of the fixed period and remortgage than to be locked down for that whole time.

But, what's the betting on interest rates over the next two years? Are we likely to see terrible rate rises? Would a variable rate mortgage be a terrible idea right now?

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Re: Interest rates

Post by lpm » Mon Jun 06, 2022 3:33 pm

Serious risk of high interest rates for the coming decade. At least, high relative to the past decade. I'd grab something fast and go as long as possible.

UK govt gilt rates, known as "risk free rates" are upward sloping as usual (normally mortgages would have a modest margin over this to reflect the extra risk, but pretty small right now):

1 year 1.60%
2 year 1.80%
3 year 1.80%
5 year 1.85%
7 year 2.05%
10 year 2.25%

Compared to inflation of 10% these are massive negative rates.

I think there's a genuine chance of 3-4% rates in couple of years. Or even 7% if inflation keeps burning away.

Personally I wouldn't touch a two year starter rate even if lovely and cheap in years 1 and 2. I'd go for ten years even if it meant 3.0%. Sure, you'd lose a bit if interest rates stay at around 1-2%, but you'd win big if interest rates went to 4%. In effect you'd be locking in negative interest rates until 2032.
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noggins
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Re: Interest rates

Post by noggins » Mon Jun 06, 2022 3:34 pm

interest rates are historically low and cant get much lower.

Bank of England base rate - Bank rate at year end (%)

year %

1979 17
1980 14
1981 14.375
1982 10
1983 9.0625
1984 9.5
1985 11.375
1986 10.875
1987 8.375
1988 12.875
1989 14.875
1990 13.875
1991 10.375
1992 6.875
1993 5.375
1994 6.125
1995 6.375
1996 5.9375
1997 7.25
1998 6.25
1999 5.5
2000 6
2001 4
2002 4
2003 3.75
2004 4.75
2005 4.5
2006 5
2007 5.5
2008 2
2009 0.5
2010 0.5
2011 0.5
2012 0.5
2013 0.5
2014 0.5
2015 0.5
2016 0.25
2017 0.5
2018 0.75
2020 0.25
2020 0.10
2021 0.25
2022 0.5
2022 0.75

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dyqik
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Re: Interest rates

Post by dyqik » Mon Jun 06, 2022 9:55 pm

I'd just go as long as you can, knowing that you can afford that rate for the foreseeable future, and knowing that inflation will likely mean increases in salary.

Mind you, I'm seven years into a 30 year fixed rate...

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Re: Interest rates

Post by IvanV » Mon Jun 06, 2022 11:27 pm

El Pollo Diablo wrote:
Mon Jun 06, 2022 2:59 pm
But, what's the betting on interest rates over the next two years? Are we likely to see terrible rate rises? Would a variable rate mortgage be a terrible idea right now?
"The betting" on interest rates is precisely the forward gilt rates quoted to you. It is "the betting" in the sense that is what the market is betting on. Of course the market doesn't know, it's like asking a bookmaker who is going to win the general election or the footy or if it will snow on 25 December, on the basis of the money they have taken on it. The market is not clairvoyant. And whilst the market can be shown ex post to be irrational, it's not in a way you can make money by taking it into account, or they'd already be doing that...

Well, the gilt rate is the prediction of the risk free rate, and a mortgage lender will add a bit for admin and risk. And anyone who claims to know any better is claiming clairvoyance.

The question is kind of, what's the best hedge. Hedging means making sure you don't put yourself in a pickle. Everyone laughed at the guy who took on a 25-yr 4% mortgage in the late 60s when variables were 3%. But it worked out very well for him, as interest rates were then high for a long time. Everyone thought British Gas was being prudent when it bought 25-yr fixed price gas in the 1980s, but it worked out very badly for it, as gas was then cheap for a long time.

It's all very well to say that high interest rates imply high inflation and so your salary will be going up to cover it. But the practical reality of paying 15% interest in 1989 when money had recently been more like 10% was that your outgoings on interest went up by 50%, and your salary doesn't go up anywhere enough to compensate for that. That was only a 50% increase in outgoings. It can be even worse today if 3% goes up to 6%, that doubles your outgoings.

What you can find these days are that there are products which fix interest rate for a given number of years, and allow you to move without paying a buy-out clause after only part of the term.

Another point to bear in mind is if you want to pay down your mortgage. Often the best practical return on investment you can get is to pay down mortgage. Generally what you can earn on money is less than what you pay on it, so paying down debt is a great return. And utterly tax free. I had reasonable expectations of being able to pay down my mortgage fast, from time to time, and so I was much more interested in a current-account mortgage or set-off mortgage than a fixed rate. I saved huge amounts of money that way. And when I wanted to fund house extensions, it was within my existing mortgage ceiling, so I didn't even have to ask. It is also psychologically promotes saving. A lot of people look at their bank account, see there is money, and spend it. If you look at your bank account and see minus £200k in it, it doesn't have that psychological "spend me" look to it, even if that minus number has been going down quite quickly.

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Re: Interest rates

Post by Bird on a Fire » Mon Jun 06, 2022 11:36 pm

I simply don't look at my bank balance #lifehack
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Re: Interest rates

Post by Millennie Al » Tue Jun 07, 2022 2:27 am

My personal feeling is that interest rates are going up substantially, as well as inflation. Inflation can be more problematic than simple theory suggests. High inflation does not mean everything increases in perfect synchrony, so you can be unlucky and find your income increase lags your increase in outgoings, leading to a significant shortfall. Of course, it could also be the other way around, in which case it would be goof to have flexibility to make overpayments.

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Re: Interest rates

Post by Martin_B » Tue Jun 07, 2022 4:37 am

Millennie Al wrote:
Tue Jun 07, 2022 2:27 am
My personal feeling is that interest rates are going up substantially, as well as inflation. Inflation can be more problematic than simple theory suggests. High inflation does not mean everything increases in perfect synchrony, so you can be unlucky and find your income increase lags your increase in outgoings, leading to a significant shortfall. Of course, it could also be the other way around, in which case it would be goof to have flexibility to make overpayments.
Unless the mortgage scene has changed significantly in the last decade or so, the ability to make overpayments is in-built into any mortgage (fixed or variable rates). Even if advertised as "fixed repayments", that generally means fixed rate rather "You must pay us exactly the amount required, not a penny more, not a penny less!" Banks don't mind you making overpayments as it reduces the liability / gets the liability off their books more quickly.

And, as someone with family in banking, if you ever do get into difficulty with repayments, they'd much rather you contact them and re-structure your repayments than get into serious trouble trying to keep up with payments which are too large. The bank might get the 'win' of foreclosing, it's usually a lot more bother for them to chase you for repayments and then suddenly have a property on their hands which they then need to offload in order to get their money back than it is to get hold of your money a bit less quickly.
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Re: Interest rates

Post by science_fox » Tue Jun 07, 2022 8:28 am

dyqik wrote:
Mon Jun 06, 2022 9:55 pm
I'd just go as long as you can, knowing that you can afford that rate for the foreseeable future, and knowing that inflation will likely mean increases in salary.

Mind you, I'm seven years into a 30 year fixed rate...
This.
Does depend on your personal financial/Life position. But I'm much happier knowing how much I'll be paying every month for 10 years, rather than having to spend days every year or two checking whether or not I can save £50 here or there. My time is worth more than that to me.
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Re: Interest rates

Post by lpm » Tue Jun 07, 2022 8:41 am

IvanV wrote:
Mon Jun 06, 2022 11:27 pm
Another point to bear in mind is if you want to pay down your mortgage. Often the best practical return on investment you can get is to pay down mortgage. Generally what you can earn on money is less than what you pay on it, so paying down debt is a great return. And utterly tax free. I had reasonable expectations of being able to pay down my mortgage fast, from time to time, and so I was much more interested in a current-account mortgage or set-off mortgage than a fixed rate. I saved huge amounts of money that way. And when I wanted to fund house extensions, it was within my existing mortgage ceiling, so I didn't even have to ask. It is also psychologically promotes saving. A lot of people look at their bank account, see there is money, and spend it. If you look at your bank account and see minus £200k in it, it doesn't have that psychological "spend me" look to it, even if that minus number has been going down quite quickly.
Personally I wouldn't want this. Depends on stage of life and risk appetite. But it's effectively saving at 3% interest, when the same money could be put into shares for a higher return. In recent years equity return has been abnormally high, but typically over decades it should be at least 4% and averaging about 7%.

But even better is if that investment is via a pension scheme because the tax advantage is huge. Again, depends on age, tax rate and outlook. But someone aged 45 with 20 years left on a mortgage has mortgage free age and retirement age coinciding. Instead of having a lower mortgage when you reach your 60s it's better to have a larger pension pot.

Earn £10,000 and pay 40% tax and you'll repay £6,000 of mortgage, earning 3%. But £10,000 would go into a pension pot pre-tax, and it will compound up at say 4%, all returns tax free. On retirement you then get 25% back in cash completely tax free. And it's pretty likely for most people in the 40% tax band will drop into the 20% band on retirement, so the remaining monthly pension receipts will have lower tax.

But of course this pension money is locked away until retirement. Can't be used to buy a bigger house or an extension or fund universities or whatever.
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Re: Interest rates

Post by IvanV » Tue Jun 07, 2022 9:29 am

lpm wrote:
Tue Jun 07, 2022 8:41 am
Personally I wouldn't want this. Depends on stage of life and risk appetite. But it's effectively saving at 3% interest, when the same money could be put into shares for a higher return. In recent years equity return has been abnormally high, but typically over decades it should be at least 4% and averaging about 7%.

But even better is if that investment is via a pension scheme because the tax advantage is huge. ...
These are all very valid points. The right decisions depend on the person and the situation.

As you say, interest rates are currently low, so the benefit of paying down mortgage is not as great as when I was mainly doing it. There were also, by chance, periods of terrible equity return over that time. So luck played its part in what worked out well for me. Equity returns have been high recently, but with a large part from capital appreciation. Asset values go up when interest rates go down, so there is a risk that these assets will depreciate should interest rates go up again. The massive difficulty with equities is choosing the right times to go in and come out - there are some very bad times to do it.

Pension investment is very tax efficient in the sense that you make the investment with pre-tax income, whereas other transactions are with post-tax income. Pension income is then taxable, whereas tax shields like ISAs are available for investments made with post-tax income. So the tax gain of pension investment may not be quite as large as it looks at first glance. I have certainly piled chunks of spare money into my pension in more recent times.

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Re: Interest rates

Post by lpm » Tue Jun 07, 2022 9:44 am

I don't really know what to do at the moment. Like you, not convinced equity investment is a good idea right now with the reset to global interest rates and hence asset yields. But holding savings as cash is obviously bad with inflation at 10%.

I keep falling back on shoving cash into the pension pot. Few pensioners are lucky enough get over £50k a year and be in the 40% tax bracket; but many middle class professionals are paid over £50k and are at 40%. So it's a direct switch, avoiding paying 40% today and pay 20% on the same money in a couple of decades.

The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
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Re: Interest rates

Post by Woodchopper » Tue Jun 07, 2022 10:00 am

In terms of predicting the future, interest rates are going up as a response to rising inflation.

So we should think about whether current global inflation is a short-term consequence caused by multiple supply shocks due to the Covid pandemic. If so global supply chains should sort themselves out fairly soon and competition between suppliers should ensure that prices remain more stable.

On the other hand, perhaps some of the current supply problems are long term, with global warming affecting food production and geopolitics affecting energy. China, the workshop of the world, isn't looking like its in a good place. If so we should prepare for inflation lasting longer, and perhaps also higher interest rates.

ETA Likewise, for Britain has Brexit been a short term shock that can be adapted to by markets, or a long increase in costs?

I don't know the answer and suspect that any answer is based upon a lot of 'it depends'.

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Re: Interest rates

Post by lpm » Tue Jun 07, 2022 10:10 am

For what it's worth, I took a 10 year fix 4 years ago. At 2.5%. I was prepared to pay a lot for certainty.

That was pre-pandemic. I was expecting high inflation to come eventually because of (a) Brexit, (b) global imbalances and (c) bad economic governance from the Tories.

For the last 4 years I've definitely lost out. Should have taken a cheaper series of 2 year fixes. But can't win them all and still happy to have the next 6 years locked in. The debt balance is shrinking fast in real terms thanks to inflation.
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Re: Interest rates

Post by El Pollo Diablo » Tue Jun 07, 2022 10:59 am

Whilst I'm here, how do mortgage repayments work in relation to variable rates? For instance, for a given loan value and remaining mortgage term, how do I work out the monthly repayment from the current rate? (I.e. not using an online calculator, I want to know the maths)

Actually, scrap that, I've figured it out
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Re: Interest rates

Post by IvanV » Tue Jun 07, 2022 2:10 pm

lpm wrote:
Tue Jun 07, 2022 9:44 am
The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
I'm pretty sure that's why such a large fraction of the houses in the posh private estates that abound in this corner of Bucks have had large upgrades recently. And why it can be so difficult to get tradespeople to attend to your smaller maintenance requirements.

And some people buy rental property with their spare cash. But then you have to manage it and market it.

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Re: Interest rates

Post by Woodchopper » Tue Jun 07, 2022 2:18 pm

El Pollo Diablo wrote:
Tue Jun 07, 2022 10:59 am
Whilst I'm here, how do mortgage repayments work in relation to variable rates? For instance, for a given loan value and remaining mortgage term, how do I work out the monthly repayment from the current rate? (I.e. not using an online calculator, I want to know the maths)

Actually, scrap that, I've figured it out
As far as I know there has been a boom in house renovations across the developed world. People were spending almost all their time at home and had surplus cash due to not going on foreign holidays or to pubs or restaurants etc

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Re: Interest rates

Post by Bird on a Fire » Tue Jun 07, 2022 4:55 pm

IvanV wrote:
Tue Jun 07, 2022 2:10 pm
lpm wrote:
Tue Jun 07, 2022 9:44 am
The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
I'm pretty sure that's why such a large fraction of the houses in the posh private estates that abound in this corner of Bucks have had large upgrades recently. And why it can be so difficult to get tradespeople to attend to your smaller maintenance requirements.

And some people buy rental property with their spare cash. But then you have to manage it and market it.
Given my and my mates' experiences with UK landlords, the bolded part isn't necessarily enormously burdensome.

There's a housing shortage in many areas, and people will accept shitholes over homelessness.
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Re: Interest rates

Post by Bird on a Fire » Tue Jun 07, 2022 4:59 pm

lpm wrote:
Tue Jun 07, 2022 9:44 am
The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
I very much like this one of reasoning, thanks.
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Re: Interest rates

Post by monkey » Tue Jun 07, 2022 5:22 pm

Bird on a Fire wrote:
Tue Jun 07, 2022 4:59 pm
lpm wrote:
Tue Jun 07, 2022 9:44 am
The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
I very much like this one of reasoning, thanks.
It's why deflation is a bad thing, why buy something if it'll be cheaper if you wait a while.

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Re: Interest rates

Post by Millennie Al » Tue Jun 07, 2022 10:46 pm

Martin_B wrote:
Tue Jun 07, 2022 4:37 am
Unless the mortgage scene has changed significantly in the last decade or so, the ability to make overpayments is in-built into any mortgage (fixed or variable rates). Even if advertised as "fixed repayments", that generally means fixed rate rather "You must pay us exactly the amount required, not a penny more, not a penny less!" Banks don't mind you making overpayments as it reduces the liability / gets the liability off their books more quickly.
Banks are very happy for you to make overpayments, but on a fixed rate mortgage there are often fees for doing so, which can be quite large. See https://www.moneysupermarket.com/mortga ... t-charges/ for details
And, as someone with family in banking, if you ever do get into difficulty with repayments, they'd much rather you contact them and re-structure your repayments than get into serious trouble trying to keep up with payments which are too large. The bank might get the 'win' of foreclosing, it's usually a lot more bother for them to chase you for repayments and then suddenly have a property on their hands which they then need to offload in order to get their money back than it is to get hold of your money a bit less quickly.
Good advice. Though technically, UK banks don't foreclose, they get an order for posession.

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Re: Interest rates

Post by Millennie Al » Tue Jun 07, 2022 10:52 pm

lpm wrote:
Tue Jun 07, 2022 8:41 am
Earn £10,000 and pay 40% tax and you'll repay £6,000 of mortgage, earning 3%. But £10,000 would go into a pension pot pre-tax, and it will compound up at say 4%, all returns tax free. On retirement you then get 25% back in cash completely tax free. And it's pretty likely for most people in the 40% tax band will drop into the 20% band on retirement, so the remaining monthly pension receipts will have lower tax.

But of course this pension money is locked away until retirement. Can't be used to buy a bigger house or an extension or fund universities or whatever.
That's for a salary sacrifice pension. For a post-tax (but approved) pension, the way it works is that your employer pays £6,000 to you and £4,000 to HMRC in income tax. You pay £6,000 into the pension. The pension operator claims £1,500 from HMRC and adds it to the pension (as if you had earned £7,500 and paid tax at 20%). You do you tax return and get £2,500 refunded by HMRC which you can then put in an ISA, another investment, or spend as you choose.

But note that a salary sacrifice pension may have other provisions such as the employer contributing an extra proportion of what you pay in.

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Re: Interest rates

Post by bjn » Tue Jun 07, 2022 10:56 pm

monkey wrote:
Tue Jun 07, 2022 5:22 pm
Bird on a Fire wrote:
Tue Jun 07, 2022 4:59 pm
lpm wrote:
Tue Jun 07, 2022 9:44 am
The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
I very much like this one of reasoning, thanks.
It's why deflation is a bad thing, why buy something if it'll be cheaper if you wait a while.
And also another reason cryptotokens are badly thought out tech bro stupidities. Most have caps on the number of tokens that will eventually be issued. In a growing economy that used crypto tokens as a currency that would necessarily mean deflation as you couldn’t make the money supply expand or contract to fit the real economy. Goldbuggery without the gold.

Not that cryptotokens can work as a currency in the first place.

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Re: Interest rates

Post by Millennie Al » Tue Jun 07, 2022 11:02 pm

lpm wrote:
Tue Jun 07, 2022 9:44 am
I don't really know what to do at the moment. Like you, not convinced equity investment is a good idea right now with the reset to global interest rates and hence asset yields. But holding savings as cash is obviously bad with inflation at 10%.

I keep falling back on shoving cash into the pension pot.
A typical pension has a substantial part invested in equities (well, until you get very near retirement age, when it may move into bonds).
Few pensioners are lucky enough get over £50k a year and be in the 40% tax bracket; but many middle class professionals are paid over £50k and are at 40%. So it's a direct switch, avoiding paying 40% today and pay 20% on the same money in a couple of decades.
Good points, though there's also the small risk of avoiding paying 40% now and ending up paying 98% "windfall tax" or suchlike in retirement.
The other way to avoid having cash is to spend it on long term consumables. Home renovations, new carpets, bikes, garden landscaping, TV. All will be more expensive in a couple of years, giving a good implicit return on money.
You could invest in something else. For example, some types of gold are not subject to capital gains tax, so are tax free. However, the price of gold can be volatile and the risk of it being stolen/taxed (e.g. https://en.wikipedia.org/wiki/Executive_Order_6102 ) is higher than for other forms of cash.

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Re: Interest rates

Post by Bird on a Fire » Wed Jun 08, 2022 9:06 am

Most UK pensions include investments in fossil fuels, so are exposed to some extent to their imminent collapse. Though divested funds are available, eg https://makemymoneymatter.co.uk/
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