Tomorrow, the Government’s new Help to Buy scheme launches. The idea’s to help those with small deposits get on the housing ladder – the premise being many can afford the repayments, but can’t save enough to build up the cash pile needed to start out. Yet while many more may be able to get mortgages, that doesn’t mean they all should.
It’s looking likely those with 5% deposits will be getting deals at around 5% interest. Compared to the rest of the market, that’s pretty high. Currently, some of the best deals for those with more equity are around 2% – so that’s £180 a month more, per £100,000 of mortgage.
Yet the real concern is what happens when interest rates bounce back to normal levels. Do note this is definitely a ‘when’, not ‘if’ – so it’s a question of timing, not whether or not it’ll happen.
Having had four-and-a-half years with the UK base rate at 0.5%, it’s easy to think that’s the benchmark of normality. It isn’t. Rates aren’t just low right now. They are nearly 2% lower than the historic lowest rates over the past 200 years. We live in an interest rate anomaly.
As I was thinking about writing about this, as if on cue, I received a tweet from @_Geordie on another subject. It provides visceral evidence of how high rates can get.
"Seeing if I can reclaim MPPI and found this in my many docs. Monthly interest rates from 1989. Jeez…"
Mortgage rates in the teens aren’t some form of financial fiction, they’re a past reality. I’m not predicting that rates will rise this high, just pointing out things can change radically within a typical 25-year mortgage term.
Therefore, anyone thinking of getting a mortgage now needs to ask themselves what’d happen if rates rose. Even just considering UK interest rates going back to a typical norm of 5% – that’s four and a half percent up, a huge rise.
Remember, each rise of 1% is roughly £60 a month more on your repayments per £100,000 of outstanding mortgage (see our mortgage calculator for exact info).
This isn’t the first time I’ve mooted this. I did it with my mortgage ticking time bomb blog back in 2009, and of course rates are still sadly low (sadly both for savers, and because it means the economy is still in the doldrums). But the premise stands – you have to plan for the worst and hope for the best.
I’d love your thoughts below.