Interest rates

Interest rates always rise on a recovery and so does inflation. I would only fix for no more than one year.

Bitstring , from the wonderful person Stickems. said

I think you misunderstood? Must be the danger with posting ahead of the question ..

He's talking about fixing for =borrowing= purposes.

I'd fix for as long as I could .. interest rates and inflation could both overshoot big time .. heck even now CPI inflation is nothing like 'under control', and cheap imports from China are going to cease being cheap before very long.

Of course whether that'll happen within a year or two, who can say. We'll have a new government by then, which may make the world and his auntie more, or less, willing to pay for UK PLC to live beyond its means.

They're going to stay pretty low for at least the first part of the period and quite likely for all of it.

However, the bond vigilantes are starting to show that they're in charge of mortgage rates and so mortgage rates will probably be higher than expected given the low base rate. The more the government insists on printing money to finance its ridiculous largesse, the more this will be so.

There are a few uber-bears who think so.

They think that the printing of money by sundry governments will overwhelm the deflationary forces and initiate something towards hyperinflation. If they're correct (and even I find it hard to imagine the US and UK governments being quite that stupid) then interest rates could hit the mid teens.

That said though, there is a mini version of the above that I think possible to likely should Brown and Darling continue on their current course of imagining that the government can borrow our way out of debt and that without limit.

This is that the bond vigilantes decide that there's scant chance of us ever paying off the debt they're getting us into and simply quit buying it at almost any price. Then we'd see the classic run on the Pound and the hiking of interest rates to 12% to 18% just to keep the finances of the country from collapsing entirely (something they've already demonstrated they'll do pretty much anything to avoid). Needless to say this would be hard on those with debts, and it'd be likely to lead to much further trouble for banks who still have dodgy mortgages and mortgage-backs out there.

My guess is that Brown will do pretty much anything to be an elected (rather than his current unelected) Prime Minister. If that means risking the above scenario then he's prepared to do so in the hope that it might ust not happen between now and the election. His only (slight) chance of winning is to keep borrowing and spending through the state and hope that things won't fall apart. In my view, this is the strateegy that's being adopted, hence the stupid denials about how bad the cuts will have to be later to pay for all this.

FoFP

I think this scenario could easily trigger another crisis as there could be millions of people unable to pay their mortgages. This is the kind of situation I am most worried about since I have a reasonable sized mortgage (by today's standards anyway). I could not afford my interest payments going up by 700%!

It's my view that neither Labour nor the Tories really want to win the next general election because we haven't seen anywhere near the worst of the credit crunch yet.

Which would slash the values of mortgage-backs and the CDOs built on them yet again, rendering the banks even more insolvent and unable to make loans (or indeed quite possibly unable to remain in business). The only difference with lat time would be that the government would be unable to bail them out because its own debt (or ability to print money) would be eliminated by what was already happening. I suspect this would be the point at which the IMF were called in and we become another Latvia, or perhaps even Iceland, as rates are hiked to 18% for the duration and a currency peg is arranged. Public services would most likely be murdered with cuts of 10% to 20% pretty much across the board.

Personally I think letting the banks go under and guaranteeing only depositors (I.E. let the shareholders and bondholders go hang) would be a much preferable way to go.

I'm guessing that few people in debt have made contingency plans for such events.

I'm sure we haven't. The best we can hope for is that house prices will fall a mere 10% by next year and that will be the halfway down point. The capitulation when it comes will see falls as much as have already gone before (which is absolutely normal for post credit bubble falls), taking them to around two-thirds down from peak to trough.

My gut still tells me though that it could get a lot worse than that. My take is that we're now where they were in 1930 as shares again approached the peak they had in 1929, but would not only fall to the prior bottom, but more than twice as far from the peak price than that. This time of coure we must substitute domestic housing for shares as the Golden Ticket of the credit bubble.

In short: theere's a great deal more to see. Don't move along just yet.

FoFP

By coincidence, I just read a Bloomberg piece on precisely this issue:

Many thanks for the thoughtful replies, everyone.

I'm minded to fix for 3 years. It's true that if interest rates stay where they are for 3 years, I'll be worse off. However, I'll still be able to afford my repayments without getting into any difficulties. It's hard to see mortgage rates going any lower, so even if rates stay the same, I won't be too much worse off by fixing.

As no-one really knows what's going to happen to interest rates, but there is a non-neglible possibility that they'll rise quite a bit within the next 3 years, I think the peace of mind that I'll be protected against that is probably worth paying a bit extra for.

Adam

That's not quite true. Forward interest rates are already set by the bond and swap markets. Just as the forward interest rates are implied by FD fixed rate mortgages.

It looks as if the 1 year FD mortgage rate is trading at a premium of ~2.5% over what the banks pay for swaps where as the 2 and 3 year rates are looking at a premium of ~1.5%.

I'm not sure why the yearly rate has a much higher premium, presumably because the base rate is so low at the moment (unsustainably low in even the short term I suspect FD think).

Personally I would be tempted to go with the three year deal.