Over 800,000 UK households to see mortgage rates double in 2023

Publish date: Tue, 10 Jan 2023

Over 800,000 UK households will see their mortgage rates more than double this year as they come off low fixed-rate deals, adding to the pressure on living standards.

In total, more than 1.4 million fixed-rate borrowers will have to renew their mortgage in 2023, with 57% currently on deals of less than 2%, according to an Office for National Statistics (ONS) analysis of Bank of England (BOE) data. The average variable rate mortgage is currently 4.41% and fixed-rate deals start at around 5%.

A typical fixed-rate mortgagor faces a £250 increase in their monthly payments if their deal expires this year. The hit will squeeze incomes further for those already reeling from soaring prices of energy and other goods.

Including households on variable deals, a total of four million UK homeowners are exposed to rate rises this year, the BOE said in December.

Banks and building societies have raised their mortgage offers because the BOE raised interest rates from 0.1% in December 2021 to 3.5% last month to tame double-digit inflation. Rates are expected to reach between 4% and 4.5% this year.

The ONS warned that the living-standard squeeze may be even harder for private tenants as rents are currently rising at 4%, the fastest pace since records began in 2016 as landlords pass on higher mortgage costs.

Private renters spend on average £106.50 a week on rent, compared with £140.80 for mortgage holders. However, as homeowners tend to be wealthier, the sums amount to 24% of weekly spending for renters and just 16% for mortgagors. For low-income renters, housing accounts for 30% of spending, the ONS added.

The ONS’s opinions and lifestyle survey found that both renters and mortgage borrowers are finding their housing costs “increasingly difficult to service”.

Landlords are particularly exposed to rising rates because the majority are on interest-only deals. More than a third of deals expire in the next two years, at which point landlords will have to choose between increasing rents to cover their costs or selling.

 

  - Bloomberg

Additional notes:

Interest-only mortgage security (IO)—interest payments stripped from a pool of mortgages which, for a given change in interest rates, fluctuates in value inversely to conventional mortgages (see principal-only mortgage security) 

Principal-only mortgage security (PO)—principal payments stripped from a pool of mortgages which, in response to changes in interest rates, fluctuate in value in the same direction as conventional mortgages but with greater volatility 

Billionaire Ray Dalio: Don't take on debt until you've asked yourself this question

Thu, 25 Oct 2018

Many young people are deep in debt: Millennials between the ages of 25 and 34 have an average of $42,000 of debt per person and members of Gen Z (ages 16 to 20) already have an average debt of $4,343. And as interest rates rise, that debt is often becoming more expensive to pay off.

Billionaire investor Ray Dalio, the founder of the world's largest hedge fund, Bridgewater Associates, advises young people to do a bit of analysis before they agree to take out a loan.

"Be very careful about debt," Dalio tells CNBC Make It. "Some is good and some is bad."

When it comes to borrowing money you'll have to pay back at a higher cost — anything from credit card debt to student loans to home mortgages and auto loans — Dalio suggests asking yourself one question: Will the debt help you save or earn more money in the future?

"Debt that produces more cash flow than it costs is good," Dalio says. For example, taking a loan to complete an advanced degree that will raise your salary above the cost of the loan's monthly payments and interest is a good form of debt, according to Dalio.

Another type of good debt is the kind that forces you to save money over time. For example, monthly payments on a home mortgage are a type of forced savings, he says, because you are socking away money into an asset you can later sell.

Since Americans often struggle to save (the personal savings rate has hovered around 6.6 percent in the U.S. since June) forced savings can be an important mechanism for Americans to store wealth without being tempted to spend it.

"Debt that creates forced savings, which is greater than you would save if you didn't have it, like buying a house, will produce good debt," Dalio explains.

Unlike taking on debt to earn more or to save more, getting a loan to buy something that won't help you in the future is a bad idea.

"Debt for consumption, or for anything that doesn't produce more income than it costs, is bad debt," Dalio says.

Racking up credit card debt by shopping for clothes or dining out and not paying off the balance at the end of the month is an example of bad debt. The average interest rate on credit cards is close to 17 percent, and consumers spent over $100 billion on credit card interest payments and fees in the last year, according to data from Magnify Money.

As a rule, Dalio prefers to avoid taking on debt whenever he can.

"I'm personally very debt and risk averse — probably too much so," he says. "That's probably because my dad lived through the Great Depression and war and he impressed upon me the freedom from worry one gets from having savings and no debt."

Dalio is worth an estimated $18 billion, according to Forbes, and founded Bridgewater Associates in his two-bedroom apartment in New York in 1975. From its founding through 2017, Bridgewater returned the biggest cumulative net profit for a hedge fund ever, according to data from LCH Investments.

"I never had significant personal debt, and I built Bridgewater without borrowing a dime or raising a dime from outside equity, and I made sure it has significant savings," Dalio says. "Besides having peace of mind, it gave me the power of knowing that I could never be knocked out of the game."



https://www.cnbc.com/2018/10/23/ray-dalio-ask-yourself-this-question-before-taking-on-debt.html

Loan criteria review won't resolve affordable housing issue

Wednesday, 19 July 2017

Referring to media reports on calls to review housing loan criteria for potential buyers of affordable houses, the central bank said in a statement that the comments had caused confusion and were not based on facts and accurate information.

PETALING JAYA: Access to financing is not the main issue in affordable housing, said Bank Negara.

Referring to media reports on calls to review housing loan criteria for potential buyers of affordable houses, the central bank said in a statement that the comments had caused confusion and were not based on facts and accurate information.

“If the issue of affordable housing is to be resolved, all parties must be clear on the root cause of the matter and honestly strive to help those affected by it,” it said.

Based on engagements with banking institutions, it found that housing loans rejected by banking institutions 

• mostly involved borrowers with high levels of pre-existing debt obligations that would expose them to severe financial risk if further debt were extended.

“For such borrowers, the risk of foreclosure is significantly higher and they are much more likely to fall in financial hardship in the event of income shocks or large medical expenses,” it said.

According to Bank Negara, eligible home buyers will continue to have access to financing.

In the first five months of 2017, RM40bil of housing loans were approved to more than 152,000 borrowers. (Average of RM 263,000 per borrower). Three quarters of these borrowers were first-time house buyers.

The approval rate for housing loans had also been stable at 74%, it said.

Banks had also introduced more flexible financing solutions to improve affordability, such as that offered for PR1MA homes.

Outstanding housing loans had continued to outpace overall loan growth, increasing by 8.6% year-on-year to RM493bil as at end-May 2017, the central bank pointed out.

“The responsible financing guidelines are in place to protect the interests of borrowers by ensuring that those who borrow are within their capacity to honour their financial obligation. Financial institutions will offer financing to all eligible borrowers and only reject loan applicants who are clearly over-extended in terms of the ability to take on more debt.”

Read more at http://www.thestar.com.my/business/business-news/2017/07/19/bank-negara-loan-criteria-review-wont-resolve-affordable-housing-issue/#DmP0bDcZSyjz9pKL.99

The real losers from lower rates Ironically, buying shares is one way of benefiting from lower interest rates.

For almost two years now investors have been taking out more mortgages than first home buyers.

When the Reserve Bank of Australia cut interest rates last week, we saw the traditional fanfare over winners and losers from the decision.

For the couple paying off a mortgage on a house they bought ten or twenty years ago, it was all upside. A lower rate reduces those interest payments and puts upward pressure on house prices, making them richer on paper and - due to lower interest payments - quite immediately boosts their spending money (or means they can pay off that loan more quickly).

On the other hand, retirees living in their own home off the income from term deposits, are seen as the victims. Lifelong savers, these people have too much cash to deserve the pension, but can't afford to live off the interest. Worryingly, they are eating into their principle. They are the first to receive our sympathy.

That's fair enough, but we hear a less about the impact on young adults. Still studying, or at the beginning of their careers, they are saving for a house deposit, often with a partner or spouse. The only problem is, their savings don't earn more than 3% in the bank, and - even putting aside a generous portion of their moderate pay package - house prices seem to outstrip even their best efforts at saving. 

House prices across the 5 largest capital cities are up 8% in the last year. Sydney has seen faster growth, with prices up 14.2% in the last 12 months, according to data from CoreLogic. There's little doubt this growth has been assisted by successive interest rate cuts. As a result, many young couples working in east coast cities, hoping to build their own nest, face little prospect of success in that regard. At least, not without some help from Mum and Dad.

Unfortunately, this leads to inequitable outcomes. Since support from Mum and Dad is now important in getting into to property, young couples who don't get that help are faced with significant hurdles to home ownership. This is particularly true in Sydney or Melbourne.

Adding insult to injury, some say that lower interest rates are to their advantage. After all, they are told, now they can afford to borrow more money. While true, this fact is hardly good news. It isn't just first home buyers who can afford to borrow more. It's everyone, including investors. And those same investors also benefit from the tax break afforded by negative gearing. 

Indeed, for almost two years now investors have been taking out more mortgages than first home buyers. For the entirety of 2015, first home buyers have accounted for less than a third of new Australian mortgages, according to data from the Australian Finance Group. That's a strong indication that investors are crowding first home buyers out of the market. 

Are there better options?

With record low interest rates offering a paltry return on savings, it is increasingly attractive for would-be first home buyers to postpone that ambition and invest in shares instead. With shares in high quality companies yielding considerably more than term deposits, the benefits of compounding are not out of their reach.

In fact, sharemarket investing is one area where a younger generation may have an advantage because statistics demonstrate that the length of time owning shares is one of the most reliable indicators of overall returns. With relative youth comes a relatively long time horizon during which a high quality business with honest and competent managers can generate value for its shareholders.

Foolish takeaway

Ironically, buying shares is one way of benefiting from lower interest rates. By investing in a sensibly diversified portfolio of shares, a young couple can position themselves to benefit from lower interest rates without taking out a 30 year loan. While it's no replacement for owning their own home (which is, after all, where the heart is) it may well be the most prudent decision. After all, a recent study from New York University found Sydney housing to be the third-least affordable in the world, with Melbourne not far behind at sixth.

http://www.smh.com.au/business/motley-fool/motley-fool-the-real-losers-from-lower-rates-20150511-ggyqca.html

Secret of the Wealthy

There are Two Types of Debts: Good Debt and Bad Debt (Real Estate Investing)

Invest for cash flows and not for capital appreciation.

Desperate homeowners and a dangerous bridge too far

By Ian Cowie Your Money Last updated: February 3rd, 2012

Bridging loans are a dangerous alternative to ordinary mortgages

Homeowners who want to move but cannot sell and others stumped by banks’ and building societies’ tighter lending criteria since the credit crunch began are turning to a dangerous alternative; bridging loans.

These can enable a second property to be bought before the existing home is sold and they can beat the mortgage famine by raising finance for buy-to-let landlords to refurbish properties at loan to value (LTV) ratios far higher than high street lenders will now allow.

Duncan Kreeger, chairman of specialist mortgage provider West One Loans, claimed: “Bridging loans net lending increased by 56pc last year, which makes the mainstream market look turgid by comparison. Borrowers are finding traditional longer-term funding harder to come by, which is making bridging finance a more attractive option.

“With high street lenders retreating even further into their shells, they won’t be able to cater for the demand for mortgage finance, particularly from buy-to-let investors, who will turn to bridging to finance their projects.”

Similarly, Ray Boulger, a director of John Charcol mortgage brokers said: “It is certainly true that the amount of bridging has expanded by a large margin over the last couple of years, filling a gap left by the banks.

“Where bridging is particularly useful in the buy-to-let market is for investors who want to refurbish a property after purchase and before letting it. The value is generally increased by well in excess of the refurbishment cost.”

But, while this form of housing finance may seem like a quick and flexible solution to the mortgage famine, it can prove ruinously expensive if a short-term fix turns into a long-term commitment.

Compound interest can prove a cruel taskmaster. With bridging loans costing at least 0.75pc of the sum advanced per month – or as much as double that rate – it can be a struggle to feed the interest meter for more than a few weeks.

David Hollingworth of London & Country Mortgages commented: “We are not a player in the bridging sector but this form of finance is useful as a short term funding option that can be arranged quickly to plug the gap between the purchase of property and later restructure to a longer term, traditional financing.

“While bridging can be used to secure the purchase of a new home before completing the sale of an old  one, it will often be used by landlords looking for quick access to funds.

“In any event it is vital to understand the limitations and cost of bridging in the longer term and important to have a viable exit route. Borrowers must have a strategy for refinancing in the longer run.”

But, as the poet Robert Burns pointed out, the best-laid schemes gang aft agley. Plans for profits can be overtaken by events and borrowing to invest is always risky because gearing not only increases gains but also boosts losses.

If that sounds somewhat theoretical, then consider the experience of a senior colleague more than 20 years ago whose wife fell in love with a property they couldn’t quite afford. Rather than waiting until they sold their existing home, they allowed her heart to rule his head and took out a bridging loan.

You can guess the rest. After several months of paying two mortgages, my former colleague put both properties up for sale in a desperate bid to bring the financial misery to an end. It nearly ruined them before they got rid of one. The resurgence of bridging loans now shows how little we have learned from the credit crunch and how quickly people forget the dangers of excessive debt.

Tags: banks, borrowers, bridge too far, bridging finance, briding loans, building societies, compound interest, dangerous, debt, homeowners, John Charcol,loan to value, London & Country Mortgages, LTV, mortgages, poet, Robert Burns, West One Loans

http://blogs.telegraph.co.uk/finance/ianmcowie/100014604/desperate-homeowners-and-a-dangerous-bridge-too-far/

UK housing sales surge but house prices remain ‘25pc too expensive’

By Ian Cowie Your Money Last updated: December 9th, 2011

The number of homes sold surged up by 4.5pc last month, helped by frozen interest rates and the "loosest mortgage lending conditions seen since the Lehman Brothers collapse" but Britain’s biggest building society warns that house prices remain 25pc more expensive than the historic norm.

First time buyers and buy-to-let landlords found it easier to obtain mortgages as loans for home purchases reached their highest number since December 2009 in November, according to the latest mortgage monitor from e.surv chartered surveyors.

Richard Sexton, director of e.surv, claimed the firm had completed more than 1m mortgage valuations over the last five years to compile its data. He said: “The market is thus far showing resilience in the face of the eurozone crisis. For the last few months, the banks have been focusing their lending on buy-to-let investors, but this is the first time they appear to have increased lending to first time buyers.

“This has resulted in the loosest mortgage lending conditions seen since the Lehman Brothers collapse. More first time buyers are rolling up their sleeves and piecing together the bigger deposits required to access high loan-to-value mortgages. No doubt they are sick of paying astronomically high rents.”

Estate agents LSL Property Services, owners of Your Move and Reeds Rains, claimed that sales surged by 4.5pc last month as frozen mortgage costs and house prices made property more affordable. Director David Newnes, said: “Static house prices don’t mean property values are standing still. Zero price growth means that in real terms property is becoming more affordable. With inflation running at 5pc, the real cost of property is getting smaller, which is good news for buyers.

“According to the Council of Mortgage Lenders, mortgage lending increased 9.8pc in the year to October and has risen for the last three consecutive months for the first time since the summer of 2007, which has contributed to the 4.5pc rise in transactions seen last month, as purchasing becomes a more affordable.”

Similarly, Paul Broadhead, of the Building Societies Association, said: “Mutual lenders saw the biggest increase in gross lending since January 2010 with £2.3 billion of mortgage lending last month, 20pc up on the same time last year. More than one in five mortgages is to a first time buyer.

“Lending responsibly has never been more important as the market remains challenging with household incomes ever more squeezed. Mutual lenders are actively trying to help consumers both by conventional means and through new options like the Government’s shared ownership and equity loan schemes.”

But Robert Gardner, chief economist at Nationwide Building Society, put seasonal good cheer in a sober long term perspective. He said: “House prices have remained surprisingly resilient over the past 12 months but housing still appears relatively expensive on a number of metrics. House prices are currently around five times average incomes, compared to the long-run average which is nearer four.”

So house prices remain 25pc higher than their long-term price/earnings average. That looks unsustainable until you consider the imbalance between supply and demand. Fewer than 108,000 new homes were built in England over the last year, while an estimated 240,000 new households were created.

As a result, if mortgage costs remain low and lending criteria continue to ease, house prices could remain expensive. But bears or pessimists should beware expecting a correction any time soon. To paraphrase John Maynard Keynes, the housing market might remain irrational for longer than sceptics can bear to remain in rented accommodation.

Tags: average incomes, Building Societies Association, building society, buy to let, buy-to-let landords, council of mortgage lenders, e.surv, equity loan schemes, eurozone crisis, first-time buyers, homes, house prices, housing,Interest rates, John Maynard Keynes, Lehman Brothers, lending, LSL Property Services, mortgage, mortgage lending, mortgages, Nationwide Building Society,price/earnings, Reeds Rains, rented accommodation, sales, shared ownership,Your Move

http://blogs.telegraph.co.uk/finance/ianmcowie/100013737/housing-sales-surge-but-house-prices-remain-%E2%80%9825pc-too-expensive%E2%80%99/

Tip: Overpay your mortgage if you can.

Mortgages

The record low Bank Rate has been the saving grace for many households. And it is likely to be a saviour for a good while yet. The dire state of the economy has increased the likelihood that it will remain at 0.5pc for the foreseeable future – perhaps even until 2014, many economists suggest.

However, the downside for borrowers is that house prices are falling and they have done so for 10 months consecutively, according to Land Registry data. It is the price slide that borrowers need to consider when applying for a home loan.

Check out the lender's standard variable rate (SVR) before falling for a cheap two-year deal, as you could end up paying more over the long term. Once the deal is up, you could be stuck on a lender's high SVR for years, if prices have fallen and erased any equity you may have had in your home. This will make it difficult to remortgage.

Ray Boulger of John Charcol, the mortgage broker, suggested that if you were already on an SVR of 3pc or less, you should stay put. He added: "If you want to opt for a fixed-rate deal or a tracker mortgage, don't consider a two or three-year deal."

Tip: Overpay your mortgage if you can. Based on taking out a 25-year home loan of £100,000, overpayments of £300 a month would pay it off 12 years early. You would pay back £123,084 rather than £146,988 – a saving of £23,903.

http://www.telegraph.co.uk/finance/personalfinance/investing/8932939/Eurozone-crisis-surviving-the-second-credit-crunch.html

How stagnant house prices are sapping spending

Leith van Onselen

May 24, 2011 - 1:37PM

Comments 24

Your home as an ATM Photo: Glen Hunt GTH

Feedback loops are an important concept in finance and economics. In a nutshell, positive feedback loops are pro-cyclical in that they act to make an economy more volatile by accentuating booms and then busts.

By contrast, negative feedback loops are counter-cyclical in that they act to reduce volatility and make an economy more stable by mitigating boom/bust cycles.

Positive feedback loops come in various forms. With respect to the Australian housing market, there are two positive feedback loops that can dramatically impact the Australian economy via their effect on the level of credit growth, aggregate demand, and employment:

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Australian home equity withdrawals

1.mortgage hypothecation – the process whereby increases (decreases) in home values result in decreases (increases) in bank capital adequacy requirements, leading to increases (decreases) in mortgage lending; and

2.wealth effect - the process of rising (falling) asset prices leading to rising (falling) consumer confidence, borrowing, household expenditure and employment.

The topic of mortgage hypothecation has been explained in detail elsewhere on MacroBusiness, and I will not expand on it further in this column.

New Zealand home equity withdrawals

Rather, I want to focus on the second point – the link between Australian home values and consumer confidence, borrowing, household expenditure and employment.

As I have argued before throughout the 2000s, when global credit conditions were benign, household debt levels and asset prices rose continually. These conditions made Australians feel richer (the "wealth effect"), spurring consumer confidence, spending and employment growth.

With house prices rising inexorably, Australians began using their homes as ATMs, withdrawing large amounts of their new found home equity…Much of this money was spent on consumption, thus further boosting incomes and employment.

UK home equity withdrawals

However, the process of debt feeding asset prices feeding confidence, consumer spending and employment growth appears to have stalled now that house prices have flat-lined. Australians have, instead, begun reducing consumption and repaying debt…

The golden era for retailing that was 2000 to 2008 is now over and the age of frugality has begun.

Wealth effect loops

Recently, a number of reports have explained the "wealth effect" positive feedback loop in greater detail.

First, today's Australian Financial Review contains an interesting article entitled Falling house prices stifle shopping, which draws on research by Citigroup showing that changes in home values are a leading determinant of household consumption expenditure:

Retailers can blame the poor housing market for lacklustre consumer spending and should expect the weakness to continue…

Citigroup…found that changes in personal wealth, together with income and interest rates, play a big role in spending…

The largest determinant of household consumption is income… But changes in the value of household assets are a leading determinant too. Houses comprise about 60% of household assets…

A 10% increase in wealth translates to 1.7% growth in final consumption expenditure in the following quarter.

This means that when house prices go up, people spend more.

The problem for retailers has been that most peoples largest asset is their home, and property values have been falling, or have been at best flat in recent months.

Citigroup's findings are supported by recent experience in Australia, New Zealand and the United Kingdom (see charts showing home equity withdrawals), where the rapid rise in household net worth up until 2007, most of which was on the back of rising home values, led to households withdrawing large amounts of home equity between 2001 and 2008. Much of this borrowing was spent on consumption, which further boosted incomes and employment.

GFC and consumption

In all three countries, rising home values between 2002 and 2008 created a positive feedback loop whereby households borrowed against their homes to fund consumption expenditure.

However, as soon as the Global Financial Crisis hit, and housing prices corrected, households began reducing consumption and repaying debt, as evident by the increasing home equity injection.

Another recent report by Deutsche Bank also lends weight to the positive feedback loop created by rising (falling) asset values. The report argues that wealth and the terms of trade have been key determinants of household savings over the past 40 years, and sees these factors as being behind the recent rise in the household saving rate.

In regards to the "wealth effect"' discussed above, Deutsche provides data plotting the household savings rate against private sector wealth. Much of the decline in the household saving rate (the flip-side of which is increased borrowing) since the early 1980s can be attributed to a rapid increase in wealth over that period, much of which was due to rising home values. With the negative wealth shock seen during the GFC there's an associated increase in saving.

Once the positive feedback loop caused by rising (falling) home values is understood, it's easy to dismiss the common misconception that unemployment would need to rise before home values would fall. Rather, rising (falling) home prices tends to lead decreases (increases) in unemployment simply because of the wealth effects described above.

Put simply, as long as Australian housing values remain stagnant or falling, consumption expenditure, credit growth and job creation will remain subdued, even with Australia's terms of trade at 140-year highs.

Leith van Onselen writes daily as the Unconventional Economist at MacroBusiness (www.macrobusiness.com.au), Australia's economic superblog. He has held positions at the Australian Treasury, Victorian Treasury and currently works at a leading investment bank. This article was republished with permission.

Read more: http://www.brisbanetimes.com.au/business/how-stagnant-house-prices-are-sapping-spending-20110524-1f1uf.html#ixzz1NJRY73vu