Bank of England Cut base rate by 0.5% to 1%

[Thmsshaun]

Interesting. Where will it all end. I mean the government wants people to go and spend and the banks to lend.

So I buy a house that is now more affordable. How many people will factor in interest rate rises and what kind of a mess will we be in 10 years down the road.

Its all too much. I think a year out of this country is whats needed for me. Or should I pay my savings in the mortage. hmmmm. Still Natwest are knocking some decent 10year fixed rates out for their advantage customers.

Its a shame the savings aren't performing but on the whole if you have a non fixed mortgage you've got to be a winner at the minute.

 

[Dryce]

So I buy a house that is now more affordable. How many people will factor in interest rate rises and what kind of a mess will we be in 10 years down the road.

One of the reasons the housing market is still stuffed, apart from confidence, is that the lending criteria have been toughened - so regardless of interest rate you're held back by income multiple and minimum deposit limitations.

 

[Dieselman]

A sizable deposit always was required until recently and the housing market was in full swing.

We are just seeing the slowdown now that has been reinstated. After a while life will return to normal.

 

[Smiley]

Colleague of mine is at 0.18% above base with no collar with Woolwich. He's miffed as he just missed out on their 0.09% offer.

He's a typical Southerner - mortgaged beyond the hilt on Interest Only.

I suggested now is a great opportunity to start paying back some of the capital and he looked at me as if I was mad.

he's a complete tw*t then. He should be paying it back as fast as he can.

 

[Dieselman]

Not if he can get a better return by keeping capital.
Repaying a debt on 1% interest is not going to save much.

 

[Dryce]

he's a complete tw*t then. He should be paying it back as fast as he can.

If 'quantative easing' results in inflation and low interest rates then the opposite is true.

 

[Thmsshaun]

Not if he can get a better return by keeping capital.
Repaying a debt on 1% interest is not going to save much.

Not in the short term but there has to be long term benefits of paying the mortgage off early. Not that I can see any myself at the moment.

Nawtwest still offer a cash isa for over 3.5%. I just wonder what that will drop down to now.

 

[WLeg]

Soon ours will be like this........

 

[jj_uk]

I specialised in Japan throughout my 25 year working carreer; my last 5 years working were spent as Head of Research in Japan for what was, and remains, one of the largest global banks (so some of you should be able to work out which one it was). I watched the boom of the 1980s turn into the lost decade of the 1990s. (I retired in 2004). I don't make public predictions about the UK but from my detailed knowledge of Japan I think it is too simple to say QE 'didn't work'. The Japanese experience demonstrates that deflation, once entrenched, is possibly more difficult to influence and turn around than inflation. Not only were there sustained periods of deflation but overnight interest rates actually turned negative at times.

The advice to maintain payments and reduce the size of a mortgage (or any other debt) is good. In a deflationary environment even if the cost of servicing the debt is 0% the real value of the debt rises (and the asset against which the debt is secured will probably continue to fall in value; it's size in proportion to income falls as salary levels drop, etc., etc..) In some respects it all became very smooth: house prices fell by 3-5% annually, but mortages often only cost 2%. Residential property yields could be as high as 7% but the expectation that prices would continue slowly to fall was entrenched.

Japan 'lost' a decade from 1990. In many ways it has still not recovered, either economically or politically. Yet there were a number of things in its favour which stopped the situation being worse. I see little to be optimistic about with what is happening in the west now. So far, there is a lot that mirrors the Japanese experience. Right or wrong, I am working on the basis that the next decade will have significant parallels.

 

[Smiley]

If 'quantative easing' results in inflation and low interest rates then the opposite is true.

If we get inflation then interest rates will be going back up as fast as they have come down. If QE does not work then we will see deflation and the value of nearly all assets will fall - and the size of your debt will go UP in real terms - even without you borrowing more. If you have borrowed money against those assets then you are heading towards negative equity. It is a scary prospect because it is so alien to all our experiences.
Either way borrowers should take the opportunity of low rates now to overpay debt and reduce capital balances. Not what Gord wants us to do but it is the right advice if you think the next few years are going to be tough.

 

[Howard]

Do you really think rates will go to 10% in the near future ?

That would put so many people ( including me ) out of their homes ....

 

[crammy69]

My fear ( Im not making a prediction as no-one really knows ) is that we have a sustained period of bi-flation, with falls in wages and asset prices (stocks/Housing etc) and rises (due to the falling £ / QE) in essential imports such as food and Oil/Petroleum. At some stage the Government will have to face (as the Irish are now) the inevitable and make very large cuts in public spending and large increases in taxes.

The Gilt auction the other day saw the UK have to pay nearly 5% for 30yr money. Given the volume of borrowing the Uk needs for its current bailout/spending plans, Its not hard to belive the market will want more when the printing presses are in full swing.

 

[Howard]

It's all a bit depressing isn't it ..

 

[Mudster]

Japan 'lost' a decade from 1990. In many ways it has still not recovered, either economically or politically. Yet there were a number of things in its favour which stopped the situation being worse. I see little to be optimistic about with what is happening in the west now. So far, there is a lot that mirrors the Japanese experience. Right or wrong, I am working on the basis that the next decade will have significant parallels.

This is actually a good reference point.

I'm a bit of a doomsdayer, I lost a property in the early 90's to the bubble and crash back then, I bought in my teens in a rush before MIRAS was removed...lost my shirt along with everything else at the time so I've always seen this property business from a somewhat negative angle....

Anyhow things recovered and it was about 5 years ago I had a feeling of deja vu.....I'm astonished it got as far as it did...there really was a lot of blind faith and stupidity at almost every level of finance in the western world never mind the UK....

Anyway here we are, and it's difficult to fully comprehend the scale of the problem we're faced with. That's mainly due to the fact that we actually don't know the true scale of the problem we're faced with and in all honestey will probably only know a true figure retrospectively.

There are many people thinking...oh this will be over with in a year or two, houses will drop back a little , probably not far from where they are now and the relentless climb of House Price Inflation will march on it's inevitable way again......I think they seriously misunderstand the depth of the problem.

I don't think we're even near bottom yet, there are too many hidden problems still waiting to announced on busy news days with a hope they will be lost behing the headlines of a natural disaster or similar.

Barclays is probably a ticking time bomb (I'm convinced there are serious reasons it chose to finance privately at enourmous cost - more in an act to stave off having to be transparent than any other reason).

Housing won't start to recover until 2012 minimum, there will then be a period of stagnation (say a further 5 years) and then, when the next generation of financial wizards leave oxbridge, fresh faced and in their early 20's...they won't have any recollection of the crap we're in now other than lines in a thesis they've written.....

It'll be different this time they'll say, and there will be an entire generation believing them.....and starting the cycle all over again.

It is capitalism....for it to work there has to be corrections, the size and ferocity of these corrections is down to the capitalists themselves and how long they allow the cycle to continue......every now and again we get a little cocky and think we can buck the trend...that's when the real big corrections occur.....and this is it now.....

Would I have it any other way? No, Capitalism is a long long way from perfect...but it's a far sight better than the alternatives.

 

[Dryce]

Do you really think rates will go to 10% in the near future ?

That would put so many people ( including me ) out of their homes ....

Why do you think you see so much fear in the government and bankers?

The property market is stuffed with people who were given mortgages of large multiples salary and interest rates have been reasonably low for over a decade. A whole generation forgot the 70s, 80s and the interest rate spike of the early 90s.

Guess what? Nobody's bugging the chancellor and PM about inheritance tax any more!

 

[Dryce]

Barclays is probably a ticking time bomb (I'm convinced there are serious reasons it chose to finance privately at enourmous cost - more in an act to stave off having to be transparent than any other reason).

I'm not quite that cynical. No matter what the banks did to raise capital the costs were high to them. I wouldn't want to fall within the clutches of the government.

I wonder how well the HSBC issue will go? Is there even anybody left to underwrite it?

Housing won't start to recover until 2012 minimum, there will then be a period of stagnation (say a further 5 years) and then, when the next generation of financial wizards leave oxbridge, fresh faced and in their early 20's...they won't have any recollection of the crap we're in now other than lines in a thesis they've written.....

Perhaps. But compared with the 90s there will still be banking wreckage about for years to come. That in itself might stand as a warning.

 

[Deleted member 6183]

Why do you think you see so much fear in the government and bankers?

The property market is stuffed with people who were given mortgages of large multiples salary and interest rates have been reasonably low for over a decade. A whole generation forgot the 70s, 80s and the interest rate spike of the early 90s.

Guess what? Nobody's bugging the chancellor and PM about inheritance tax any more!

Hasn't the IHT threshold been doubled (for couples)?

 

[CE230]

It has been changed to allow for recovery of the unused allowance of one of the partners which effectively doubles IHT.

I bought my first house in the early 70's and sold at the height of the boom a few years later. Our current house we bought when interest rates were 15% and were also sold an endowment mortgage. Although we aren't going to get the promised jackpot in a couple of years we won't have any contribution to make to the final payment. The house has also quadrupled in value.

Compared to what people are having to pay to keep a roof over their heads theses days our repayments are a pittance. I feel for my daughter and her friends who are going to have to resign themselves to years of living with mum & dad as the first rung of the property ladder is way above their heads at the moment.

 

[Smiley]

My fear ( Im not making a prediction as no-one really knows ) is that we have a sustained period of bi-flation, with falls in wages and asset prices (stocks/Housing etc) and rises (due to the falling £ / QE) in essential imports such as food and Oil/Petroleum. At some stage the Government will have to face (as the Irish are now) the inevitable and make very large cuts in public spending and large increases in taxes.

The Gilt auction the other day saw the UK have to pay nearly 5% for 30yr money. Given the volume of borrowing the Uk needs for its current bailout/spending plans, Its not hard to belive the market will want more when the printing presses are in full swing.

I fear you may be right. It was known as stagflation in the 1970s.
We are caught in a tricky place. We spent a lot of money as a country that we did not really "earn" - we took the money out of spiralling house prices and then spent it (mainly) on imported goods that created no value for UK PLC. So now we are left with the debt to re-pay and little or no manufacturing to earn "real money" to pay it back.
Seems to me that one way or another whether it be deflation or inflation we have to get used to the fact that all our living standards are going to decline relative to the world stage.
I wish we had a leadership team that would admit this position and have some real plans to generate wealth for the UK instead of proposing that we spend our way out of recession and buy some more imported goods. I am not suggesting trade barriers just a plan for Britain for the people of Britain.

 

[crammy69]

I wish we had a leadership team that would admit this position and have some real plans to generate wealth for the UK instead of proposing that we spend our way out of recession and buy some more imported goods. I am not suggesting trade barriers just a plan for Britain for the people of Britain.

I get the impression that, in private, the Government is well aware of how and why we got into this mess, but are clinging, publicly at least, onto the hope that the majority of the country will not twig quite how bad things are and keep spending for long enough for world growth to turn such that the impact is softened. Unfortunately this is a worldwide problem. At least for Japan in the 90's they had exports and strong worldwide growth to soften the blow, we however cant expect this.

Alot depends on how China decide to act, they have been exporting goods and capital to the US and UK, hopfully they will continue the capital, and in some way promote domestic demand to replace out own inablity to import.