Mortgage crisis isn’t bad as the 70s and 80s – but it’s not far off!

For many homeowners with mortgages to pay, it’s tin-hat time.

Tomorrow, barring a U-turn to end all U-turns, the nine (wealthy and mortgage-poor) members of the Bank of England’s Monetary Policy Committee will sip their cups of Earl Grey, have a digestif or three, and then a approve a new rate hike.

Emotion is pushed under the table. Nine hard noses will come to the fore.

It will be the 13th base rate increase they’ve approved in the last 18 months – and it won’t be the last.

Whether they jump to 4.75 percent or 5 percent, the committee members are not done with their dastardly work.

Repayments: The social think tank, the Resolution Foundation, says annual loan costs for those re-mortgaging next year will rise by an average of £2,900

All the signals and wisps of smoke emanating from the Bank’s Headquarters on Threadneedle Street in London suggest that interest rates will have to be pushed even higher to tame the curse of inflation.

This is because overcoming inflation is the Bank’s overwhelming mission, and it is willing to do almost anything – yes, jeopardize the economy, threaten our livelihoods and jobs – to achieve it.

Short term pain for long term gain. Indeed, we’ll get a sense of whether it’s progressing today when the latest inflation numbers are released.

Anything above 8.7 percent (previous month’s figure) is likely to cause the base interest rate to rise to 5 percent – and the financial markets to panic even more than they are now.

Of course, higher interest rates won’t affect all mortgage borrowers tomorrow. Many will currently be sitting on cheap fixed rate loans bought smartly when the base rate was a favorable 0.1 percent.

Still, between now and the end of next year, some 2.5 million homeowners will reach the end of these cheap deals.

Apologies for misusing a 15th century fable, but many of these borrowers will jump out of the fridge, straight into the proverbial fire, stretching their household finances to the limit. Some of them may not be able to handle it.

Also, tomorrow’s base rate hike will drive up mortgage bills for those homeowners with variable rate loans, while making it even harder for first-time buyers to get a foot on the housing ladder.

> Why are mortgage rates rising so fast – and how high will they go?

It’s not a good picture then: Household finances are under mortgage pressure; a lack of new borrowers; and house prices are starting to fall.

Still, some financial analysts believe inflation can only be truly suppressed if interest rates rise sharply, hitting mortgage borrowers in ways not seen since the early 1990s — and before that in the late 1970s.

In 1979 the median house price was £23,497 typical rate: 15%

The average house price today is £260,736 with a typical mortgage rate of 6%

In 1979 the median house price was £23,497 typical rate: 15%. The average house price today is £260,736 with a typical mortgage rate of 6%

Mortgage Chaos Explained: This is Money podcast

The mortgage market is in chaos, lenders are closing deals and rates are rising rapidly.

At the same time, savings rates are going gangbusters and hardly a day goes by without a new best buy.

Georgie Frost, Helen Crane and Simon Lambert from the This is Money podcast explain why the sudden inflation-driven chaos has begun and what borrowers and savers can do.

Press play to listen on the player above, or listen to Apple podcasts, Audio tree, YouTube And Spotify or visit our This is the Money Podcast page.

The price pain in the 70s, 80s and early 90s

On the surface, today’s mortgage borrowers appear to be in a much better position than their parents and grandparents who owned homes in the late 1970s or early 1990s, when both double-digit and mortgage rates were the norm.

It’s a point many older readers have been eager to make in recent weeks – and some believe the current generation of homeowners don’t know what real mortgage pain feels like.

They believe their children and grandchildren have not gotten used to having their coats cut to their liking – and so they are unwilling to make sacrifices if necessary (e.g. taking one fewer holiday abroad per year or a little-used Netflix or gym to cancel). subscription).

That’s what they did as homeowners in the 1970s and 1990s: tighten their financial ties to keep a roof over their heads.

It’s easy to see where they’re coming from. In the 1970s, the British economy was ravaged by a toxic combination of rising oil prices, widespread strikes, a three-day week and skyrocketing wage increases in response to demands from agitated trade unions.

While some of this was overseen by Conservative Prime Minister Edward Heath, it was the Labor government from 1976 to 1979 – headed by James Callaghan – that had to beg the International Monetary Fund and beg for a rescue package.

Earlier, in 1975, inflation had reached 25 percent, while base and mortgage rates later peaked at 17 percent and 15 percent, respectively, paralyzing the housing market.

Only after Margaret Thatcher inherited Labour’s broken economy in 1979 did inflation begin to be addressed – but it came at a high price, with unemployment surpassing three million for the first time since the 1930s.

The late 1980s and early 1990s saw more punishment for homeowners, as a combination of interest rates peaking at 15 percent and mortgage rates at 15.25 percent were the triggers for an all-powerful home price correction.

Between 1989 and 1993, house prices fell by an average of 20 percent, with a 30 percent drop in cities such as London.

Against the backdrop of a recessionary economy and rising unemployment, many homeowners were unable to meet their mortgage payments and had their homes repossessed by lenders.

In the first half of the 1990s, 345,000 homes were repossessed. To put that in context, there were only 750 seizures in total in the first three months of this year.

So, is the mortgage pain felt by many homeowners a price worth paying to kill inflation? (The social think tank, the Resolution Foundation, says annual borrowing costs for those re-mortgaging next year will rise by an average of £2,900.)

Or should the government heed the Liberal Democrats’ call to end the ‘mortgage horror show’ by establishing a mortgage protection fund? In other words, the state acts as a nanny.

So far, Rishi Sunak, the architect of the lockdown furlough scheme, has ruled out such a move.

Homeowners can check how much they would pay based on their home’s value and loan size with This is Money’s best mortgage interest calculator.

How do current interest rate increases compare to the past?

Yesterday I asked Nationwide economists to calculate today’s mortgage payments and compare them to those in the 1970s and early 1990s. Figures that could support the cynicism of some more mature

readers — or tap into the camp of Lib Dem leader Sir Ed Davey.

In the first quarter of this year they were 37 pc. far below, although recent higher mortgage rates could rise to 43 percent if 6 percent becomes the new lending rate norm. In other words, affordability is becoming a bigger problem for starters.

In the first quarter of this year, they were well below that at 37 percent, although recent higher mortgage rates mean it could rise to 43 percent if 6 percent becomes the new lending rate norm. In other words, affordability is becoming a bigger problem for starters.

In terms of house prices as a percentage of average income, the ratio was about four in 1979, with the average house price at the end of the year at £23,497. By the third quarter of 1989 (before the house price crash) it had risen to 4.8, with an average house costing £62,782 compared to an average income of £13,000.

Today the ratio stands at 6.25 with an average home worth £260,736 and an average income of £41,800.

To put this in context, it is well above the long-term average of 4.5, but lower than a peak of 6.9 a year ago. So what does the Nationwide make of all this?

Senior economist Andrew Harvey says: “While recent interest rate hikes make conditions increasingly challenging for people looking to buy a home or refinance their mortgage, the market is in a very different state than it was in the late 1970s and late 1980s, when interest rates hit 17 percent.’

Today, more than 85 percent of loans are fixed-rate, meaning existing borrowers are protected, at least in the short term. There are also stricter affordability criteria these days to ensure that borrowers can absorb interest rate increases.

There are also stricter affordability criteria these days to ensure that borrowers can absorb interest rate increases.

“Conditions in the labor market remain solid, unemployment is still near record lows and household balance sheets appear to be in relatively good shape.”

In other words, most homeowners can weather the financial horror show orchestrated by the Bank of England’s Monetary Policy Committee.

Just like their parents and grandparents did 30 or 40 years ago – under more severe circumstances.

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