PRACTICAL ADVICE TO HOUSE BUYERS
If you are buying a house now you should be worried about the future course of interest rates.
If you are buying a house now you should be worried about the future course of interest rates.
For every 1% that interest rates rise, your payments may rise as much as 10% or 12%. More if you have an 'interest only' Mortgage. This 'dynamic gearing' happens all the way down as interest rates fall and it happens all the way back up when they rise.
Where is the middle of this cycle? For America and the USA it may be around 7% interest. (See Finding the Mid-cycle Interest Rate if you are academically inclined).
Interest rates will not shoot up right now when everything is depressed and people are afraid to borrow, but when there is 1% inflation and 3% p.a. economic growth, and confidence is restored this is where interest rates will be headed in order to stave off inflation. It could go higher because of the QE monies. We don't really know how that will pan out.
This 7% mid-cycle rate of interest explains why Ben Bernanke had to raise interest rates by over 4% to slow inflation. Interest rates on Mortgages had reached a low point of 3.5%.
If you were one that was borrowing at 3.5% adjustable in 2007/8 that translates into a 40% - 50% increase in your payments at 7% p.a. interest. That is not just a problem for sub-prime people who cannot pay anyway. It is a major problem for YOU.
If you were paying interest only then the interest payments would have at least doubled.
In fact the whole Mortgage Model is unstable. At ANY time it unbalances the economy in several ways.
Interest rates will not shoot up right now when everything is depressed and people are afraid to borrow, but when there is 1% inflation and 3% p.a. economic growth, and confidence is restored this is where interest rates will be headed in order to stave off inflation. It could go higher because of the QE monies. We don't really know how that will pan out.
This 7% mid-cycle rate of interest explains why Ben Bernanke had to raise interest rates by over 4% to slow inflation. Interest rates on Mortgages had reached a low point of 3.5%.
If you were one that was borrowing at 3.5% adjustable in 2007/8 that translates into a 40% - 50% increase in your payments at 7% p.a. interest. That is not just a problem for sub-prime people who cannot pay anyway. It is a major problem for YOU.
If you were paying interest only then the interest payments would have at least doubled.
In fact the whole Mortgage Model is unstable. At ANY time it unbalances the economy in several ways.
If you are paying much less than 7% interest, and the rate is not fixed for at least ten years, you should be concerned about this.
WHAT YOU CAN DO
It would be better if you imagined that the interest rate was at least 2% higher. One adviser is telling his clients to take a variable rate mortgage because interest rates where he lives can be about 2% lower just now - November 2012. But still to pay the higher fixed interest rate - putting the additional money not into mortgage repayments but into a savings account that can be used to help when the interest rate does rise. And if it doesn't rise, it can be used to repay the mortgage one day.
Even if property prices appear to be strong or rising, unless you live where special factors are affecting the market, like Central London where foreigners are piling in, you should not trust the price rises just yet. Wait till interest rates resume normal levels. Then you may start to take a more confident view.
Even if property prices appear to be strong or rising, unless you live where special factors are affecting the market, like Central London where foreigners are piling in, you should not trust the price rises just yet. Wait till interest rates resume normal levels. Then you may start to take a more confident view.
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