Increasing the interest rate to 5%, is this really the fairest way to slow inflation?

I came across an online government data which stated that the increases in interest rates up to December 2022 will add 60% to the mortgage payment.

So if you are paying £600 per month under a 2 or 3 years fixed term, the mortgage payment will increase by at least £360 once the fixed term expires and you move to the variable rate this year.

Don’t you have to pay a hefty penalty if you try to re mortgage before the fixed term ends?

DaisyAnneReturns

I asked a question. I didn't make a claim.

I do question "All 5 year fixed mortgages can't go up this moment, can they?" All have different dates of signature, I'd think.

Just to clarify, the interest rate has been above 5% since October 2022, so millions of mortgagees whose terms had expired in that period are already paying much higher rates, the risk is that it will rise further still.

Bank rate last October was 2.25%. It only rose to 5% this month.

Norah

DaisyAnneReturns

I asked a question. I didn't make a claim.

I do question "All 5 year fixed mortgages can't go up this moment, can they?" All have different dates of signature, I'd think.

Norah:
"Around 90% of mortgages are fixed – predominantly for five years – a huge sea change compared to 10+ years ago when most were on variable rates." Curious, mortgages can't go up right now, can they.

Norah:
I didn't say that.
All 5 year fixed mortgages can't go up this moment, can they?

And now you have added a question mark it is, indeed, a question. Originally it was a statement.

I apologise for not realising someone, anyone, would even question whether all mortgages could go up in one particular moment. Hopefully, you now feel your question has been answered.

SporeRB

I came across an online government data which stated that the increases in interest rates up to December 2022 will add 60% to the mortgage payment.

So if you are paying £600 per month under a 2 or 3 years fixed term, the mortgage payment will increase by at least £360 once the fixed term expires and you move to the variable rate this year.

Don’t you have to pay a hefty penalty if you try to re mortgage before the fixed term ends?

Yes, often around the £1K mark, I believe. When we had a mortgage, the rules around how much you could borrow were so much tighter in relation to multiples of salary, especially the second income. We didn't have student debts to pay off, an energy crisis and childcare costs were relatively low, it was still a struggle when interest rates peaked in the 90's but we never had any fear about being able to get through it but there are people out there now who are very worried, families with children who don't have a bank of mum and dad to go to, families and pensioners in private rented accommodation with limited fixed incomes who are facing big rent hikes and older people who have used their pension pot to become buy to let landlords who have much bigger outgoings than they thought and see their pension income diminishing. In some ways it's easier to talk about "numbers" but the numbers are real people and although I've had my struggles in the past I genuinely wouldn't wish that on anyone.

It changed as we moved into service industries foxie. We seemed to necome a country that traded money and monetary products, and there was a more, more, more attitude.

The trading and manufacture of goods seemed to fall into the background.

Germanshepherdsmum

Bank rate last October was 2.25%. It only rose to 5% this month.

Mortgage rate, I should have clarified what I meant, sorry.

Mortgage rates were whatever people had signed up to!

To be more specific, the average for mortgage rates- new and for new term.
commonslibrary.parliament.uk/research-briefings/sn02802/

This is very informative.
www.uswitch.com/mortgages/mortgage-statistics/

DaisyAnneReturns

Norah

"Around 90% of mortgages are fixed – predominantly for five years – a huge sea change compared to 10+ years ago when most were on variable rates." Curious, mortgages can't go up right now, can they?

1.4 million fixed-term mortgages set to expire in 2023. Why do you think they can't go up?

DaisyAnneReturns And now you have added a question mark it is, indeed, a question. Originally it was a statement.

I began by asking a question, it was always a question, I didn't change from a statement to a question. You changed it to a statement.

I did leave off the all in my first question.

Surely I could ask - it seemed improbable, to me, that all the outstanding 5 year fixed mortgages would reset at once. Because they can't/don't - some reset prior to the rates going up.

Don't attempt twisting my questions, of course you may find mine stupid questions. All can see what I inarticulately asked. Twice.

Mortgage rates do not go up equally at the same time. They did in the days of 25 year variable rate interest mortgages, but not now.

How much any mortgage payment will go up will depend on the mortgage rate when the mortgage was negotiated, how long the fix was for and what the rate will be when it needs to be renegotiated.

Assuming that most mortgages are repayment mortgages, it will also depend on how far through the overall 25 years length of a mortgage you are.

Monthly mortgage payments are a mix of interest rate and capital repayment and to keep the monthly payment even, in the early years each monthly payment is nearly all interest with only a small amount of capital paid back, but this changes as the mortgage progresses and by the time you reach year 20, most of the monthly payment is capital repayment, a figure falling fast and the interest payment proportion is quite small.

So if 2 people both have £100,000 mortgages, currently paying 3% interest, due to go up to 6% in September but one is in year 2 of their mortgage, while the other is in year 22 of the mortgage, the person in year 2 of their mortgage will face a substantial rise in their monthly payments because with so much capital still to be repaid, the interest payable on nearly £100,00 will be high.

For the person in year 22, they will probably have repaid at lest half their mortgage, probably 60%, £60,000, so the new interest rate will be calculated on the £40,000 capital outstanding, which will be much less than the interest on nearly £100,000 the person in year 2 of their mortgage will pay, so the second person's interest payment will go up, proportionately much less, and this will affect their overall household budgets much less.

Good examples and explanation, M0nica.

As M0nica articulately notes, new interest only impacts the balance still due. Many people will owe little, many may still owe quite a bit, each figured to their own new payment. Not all setting on one day.

Not a household budget disaster for all mortgage holders.

Norah

Good examples and explanation, M0nica.

As M0nica articulately notes, new interest only impacts the balance still due. Many people will owe little, many may still owe quite a bit, each figured to their own new payment. Not all setting on one day.

Not a household budget disaster for all mortgage holders.

No, but there’s a disproportionate impact on younger people who are much more likely to have a long term left on their mortgage, and will have extended themselves more in terms of salary multiplication as house prices have risen. If for example you wanted to move from a flat to a house and take out an additional mortgage for the difference you would be thinking very hard about doing that at the moment. There are quite a few threads on Mumsnet where people have relayed their additional mortgage payments when their current deals come to an end, and it is frightening - £500 a month more was one quoted.

Casdon but it has always been like that, and when lenders are working out how much someone can afford to borrow, they factor in, I think, the lender's ability to meet payments if the interest rate goes up by several %.

Do not misunderstand me, I have every sympathy for those in the early years of a mortgage and facing these huge jumps in interest, but these interest rates did not come as a surprise.

That interest rates would not stay at their historic low much longer has been discussed in the press and on the media for 3 or 4 years now. We took out a Retirement Interest Only mortgage a couple of years ago to fund an extension to our house and we consciously put length of fix ahead of getting the lowest interest rate for just that reason.

When we bought our first house, we had a whole set of contingency plans to deal with different scenarios, that might cause us problems.

I do think there ought to be some help for those in the early years of their mortgage who are having to refix while interest rates are so high, but there are about 11 million mortgage holders in the UK and the majority of those will not be facing the huge increases in mortgage payments. Help is needed for some, but it should be targetted.

I think what has changed is peoples options to dig themselves out of a mortgage black hole now Monica. Everything you have no choice but to spend money on has increased, and both partners in most couples work already, their mortgages were taken out on the basis of them doing so, so there are less options to make ends meet by taking on more hours. I think you’re right, help should be targeted. Even then I can see there being a significant rise in the number of repossessions.

It has been agreed that there will be an embargo on repossessions for twelve months and that lenders will offer temporary switches to interest only and lengthening of mortgage terms. Lenders now build in an interest rate rise of I believe 3%when considering affordability and as MOnica has pointed out, interest rates were never going to remain at the historic lows of the last few years - it’s hard to sympathise with borrowers who didn’t think about that when deciding how much to borrow.

I don't find it hard to sympathise with borrowers and find suggesting they didn't think of the consequences of an interest hike a bit patronising. What they couldn't foresee and therefore plan for (neither could the lenders) was that they would be hit with huge increases on fuel and food because of events which were completely out of their control. I'm one of the fortunate ones, I've got savings but I know of many families who live from one pay day to another and they are no doubt, sick with worry. They are not indolent, stupid people who lack financial knowledge because they managed to scrape together a deposit for a small home and stretched themselves to pay a mortgage. These are people who would still be caught because they lived in rented property, paying ever increasingly high rents, had no security of tenure and wanted to give themselves and their children a better life or even worse, were living with their parents in their 30's. Do have a look at the cost of renting, it's frighteningly expensive and difficult to find. Honestly people, a bit of compassion is at least free.

Casdon we took our first mortgage out in June 1969. Look at the graph for 1970s mortgage rates in this link www.telegraph.co.uk/property/news/people-complaining-interest-rates-mortgage-1970/. It is no different to the pattern we have had recently.

In the 1970s, inflation, over the whole decade averaged 12% on a calendar-year basis, peaking at almost 23% in 1975. As well as hitting levels not seen in any other post-war decade'

Back in the 1970s we faced the same problem of rocketing interest rates, galloping inflation, far higher than now and Bulding Societies, then were entirely unsympathetic to those having problems and simply foreclosed, end of. None of the current attempts to find ways round to help etc etc.

Unemployment rates were also rising steadily through the 1970s reaching nearly 7% at the end of the decade and the labour market was much less flexible. Most jobs were full time and there were very few part time jobs. There was also no maternity leave, maternity pay. It was very difficult to work 'extra hours or find part time work.

Does no one remember the housing slump from, roughly 1988 -1995, when there were wholesale repossesssions, mainly of small first time homes, and in many areas the price of starter homes halved. DD entered the housing market in 1993. She made offers on 2 flats in South London, one fell through because it had an absent freeholder so she could not get a mortgage, but both were selling for half the price the owners had bought them for 4 years previously.

I am not without sympathy for those early in their mortgage caught by high interest rates, but there is nothing unique about the situation and many of us faced exactly the same problems but worse 50 years ago and there were similar problems in the 1980s going into 1990s.

So please, no special pleading. it will not wash.

M0nica these interest rates did not come as a surprise.

That interest rates would not stay at their historic low much longer has been discussed in the press and on the media for 3 or 4 years now.

Of course nobody thought ridiculously low interest rates could last forever. No surprise whatsoever as to the new rates.

Proper prior planning would have ameliorated some people's problems. Lenders offering temporary switches to interest only and lengthening mortgage terms - should hopefully help most people.

www.mortgageable.co.uk/wp-content/uploads/2022/12/History-of-Mortgage-Interest-Rates.png

This is why people are struggling Monica. Interest rates have been low for 15 years. Most people with newer mortgages have not known or expected them to change more than perhaps a couple of percent. They don’t have the memory of tougher times that age and experience brings. The inflation on everything else is also impacting people hugely. You can be unsympathetic, I believe I’m being realistic.

PS It’s not a sob story from me, I haven’t had a mortgage since my husband died over 15 years ago and it was paid off, my daughter is overpaying on hers, so I’ve got no personal axe to grind.

As I wrote on Sunday, the B of E interest rate between 2009 and 2022 was less than 1%. As far as I can see there has never been such a long period of flat lining before. It's not surprising that newer borrowers did not anticipate such an increase.

I'm wondering how many lenders and mortgage advisers pointed out the frequent changes in rates in earlier years so that more recent borrowers were made aware.

Last year the daughter of a friend bought a house. During the period that she was looking at mortgages she changed jobs with a large salary increase. Her broker telephoned her to say that she could borrow a further £60k if she wished. She didn't wish to since she was quite happy with the house she was buying.

Casdon there have been so many articles in newspapers on line, everywhere for about 4 years aor more saying interest rates are due tp rise and cannot stay so low.

Again back in the 1970s, we had no expereience of mortgage rates going as high as they did and certainly no experience of interest rates nearly double and sometimes treble what they are now.

As I said I do not lack sympathy, but just believe that the whole thing is being over egged saying that people today are suffering far more than we did in the past. They aren't and we got through it. Perhaps a bit of hardship would be good for some of them. Let them know that they need to learn to take the rough with the smooth.

Exactly.