A few months ago I wrote about stress testing your mortgage ahead of higher interest rates. The threat has hardly abated, with the Financial Times noting that:
Borrowers now looking for another offer as their fixed period comes to an end will face much more expensive terms.
Average rates on a two-year fix have nearly doubled from 2.24 per cent a year ago to 4.24 per cent this week, according to finance website Moneyfacts.
The FT article (search result) adds that banks and building societies have pulled lots of mortgage products off the market, and they are being particularly quick to yank their most competitive mortgage deals.
The best table-topping rates might only be available for a few days before capacity is exhausted.
Hunting high and low
So far, so hairy.
Yet arguably we mortgage holders have never had it so good.
Because what would be spectacularly odd to any time traveler from the 1980s – who oddly chose to gawp at yield curves rather than, say, the iPhone – is the clear blue water between inflation and interest rates.
The UK CPI inflation figure favoured by the government and the ONS dipped unexpectedly this week. But it’s still at 9.9%.
The officially semi-defunct RPI figure that remains widely used in contracts is 12.3%.
Meanwhile the Bank of England’s Bank Rate is only 1.75%!
True, Bank Rate will surely be raised to 2.25% next week – it would already be there were it not for the period of national mourning – and given the state of core inflation I wouldn’t rule out a hike to 2.5%.
The pound falling adds even more pressure to raise rates. Sterling weakness makes imports (and commodities) even dearer – and we import a lot in Britain.
Yet even a 2.5% Bank Rate would be sat 8-10% below inflation, depending on how you measure the latter.
Whereas for most of my life – up until the financial crisis – interest rates ran well above inflation:
The Bank of England mandarins are of course familiar with this graph.
But from the start, this current inflationary episode has been seen as more a problem of supply than demand.
And despite a shocker in the US data this week, there are signs the inflationary impulses that set this ball rolling are, well, rolling over.
Inflation is still expected to fall back towards target by 2024.
The sun always shines on TV
As for demand, does anyone have a sense the UK economy is roaring?
Perhaps the housing market has been running a bit hot. But aside from that it would be a watered-down punchbowl that the Bank of England would be taking away were it to get rate-rise happy.
Even an expansionary fiscal plan from the new UK chancellor in his Budget next week would only be giddying-up what seems like a pretty stagnant economy.
It’d probably add a smidge to long-term inflation expectations, because just like last week’s energy relief plan it will likely add to long-term borrowing.
But I don’t see the Budget setting off one of those Tory booms that gets named after the chancellor later when the blame is doled out. (Barber, Lawson…)
An end to conflict in Ukraine would fire up the old animal spirits. But that might equally reduce some of the global price pressures and supply chain issues that were already easing before Putin sent in his tanks.
(Of course I’d take it regardless of its impact on the price of eggs or mortgages).
Take on me
Odd as it seems then, I’d bet five-year fixed rate mortgages will peak at around 4% – at least for this cycle.
Even with inflation running at high teen double-digits for a short while.
In other words, it probably won’t get much worse from here, from a borrower’s point of view.
Of course your guess is (almost…) as good as mine. Events can do a number on economic expectations, anytime, anywhere.
What’s more the Bank of England’s commendably honest and downbeat talk has not been matched by as aggressive a campaign of rate rises as we’ve seen from some of its peers. Maybe the rate-setters will lose their nerve?
Time will tell, but for now inflation is fast paying off your mortgage in real terms.
Enjoy it while it lasts!
Expected returns: Estimates for your financial planning – Monevator
From the archive-ator: Financially independent in ten years: a plan – Monevator
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Mini-budget expected on 23 September to reveal new PM’s fiscal plans – Sky News
UK inflation falls to 9.9%, but still close to a 40-year high – Reuters
Pound hits 37-year low as retail sales slide – BBC
The Queen’s death could tip the economy into recession – Yahoo Finance
Why the King won’t have to pay inheritance tax on his estates – Sky News
Britain’s lowest-paid workers say finances have never been worse – Guardian
Switching to renewables could save the world trillions, Oxford study funds – BBC
World Bank warns higher interest rates could trigger global recession – Guardian
Weekend reading: the upside of our high inflation – Monevator – american banker conference – Banking – UK Prime News
Why you should continue to own equities after you retire – Vanguard
Products and services
Natwest and RBS offer £175 switching bonus to new and existing customers – ThisIsMoney
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
‘Confirmation of payee’ checks spread, but millions still unprotected – Which
If you must have a second home then you also need a ‘guy’ – MarketWatch
What happens if you don’t pay your bills? [Podcast] – Which
City centre homes for sale, in pictures – Guardian
Comment and opinion
How the worst market timer in history built a fortune – Compound Advisors
Why medics – and everyone else – can benefit from a high savings rate – White Coat Investor
Is it best to take the 25% tax-free pension lump sum in one go or in chunks? – ThisIsMoney
If you want to be wealthier, let go – Darius Foroux
Should you invest more after a market decline? – Of Dollars and Data
Is the obesity epidemic a threat to your retirement? – A Teachable Moment
The pros and cons of multi-generational living – Humble Dollar
The most dangerous phrases in personal finance – Thomas Kopelman
Swedroe: look beyond expense ratios when choosing index funds [Nerdy] – TEBI
Working late mini-special
The over-65s forced to join ‘The Great Unretirement’ – Guardian
Can’t stop working – Humble Dollar
Tax traps warning for over-65s returning to work [Search result] – FT
Crypt o’ crypto
The Ethereum merge has happened. What does it mean for investors? – CoinDesk
NFT traders pay more for pretty cryptopunks [Research, PDF] – SSRN
Naughty corner: Active antics