The average UK mortgage loan is about £96,000. Many will be surprised by that, I suspect, but must mortgages are not new, of course.
The reason why I worry about mortgages is quite straightforward. We know interest rates are going to increase. The amount by which they will is arguable. I think a base rate of 3% is foreseeable. An increase of 1.25% by the end of 2015 is, on that basis, likely. The new plateau would be reached a year or so later.
But the implication is obvious , and is that within 18 months or so of a new parliament the more than 9 million households with mortgage debt will be seeing their average monthly outgoings increase by about £200 a month. That is, to put it in context, about £22 billion of consumer spending that will not be happening each year as a result - which is the equivalent of increasing VAT by more than 4%.
So the simple question to any potential Chancellor is how are you going to keep any recovery going in the face of this? And it would be naive to assume that all those extra mortgage payments will be compensated for by increased income payments to savers who will consume instead. Firstly, savers by definition don't spend all they earn: that is why they are savers. Second, I cannot see savings rates rising by as much as mortgage rates; that never happens. There will be some countervailing trend, of course, but by no means enough to compensate.
So I think the most direct question each prospective Chancellor will have to answer in a years time is how they will prevent an interest rate rise creating a seemingly inevitable new downturn in the economy. So far I have heard no answers.
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Interesting that you concentrate on those fortunate enough to be able to own a property (government ministers etc), but how about those of us who’ve have their small savings account decimated for years because of the ridiculously low interest rates? I’ve seen my savings just about disappear, is that right??
Most savers – the retired – have done very well in recent years
No one worried about this back in 2006 and 2007.
Its a bit late now to worry, instead people need to refinance as soon as possible.
You cannot put an increase off forever
Has the economy now recovered then?
Theoretically it is better than it was
Sorry to quote it again but remember Brown in 1997:
“I will not allow house prices to get out of control and put at risk the sustainability of the recovery.”
So what we are left with is infinite re-financing and rehypothecation-an inflatable can being kicked down the road. I now think that the finance sector knows this and has factored in the next crisis. Ann Pettifor points this out in her book ‘Just Money’. The choice now is wealth syphoning and debt peonage or wealth syphoning and debt peonage….take your pick.
Are household savers the major beneficiaries of an interest rate rise?
The majority of bonds are securitised into bonds held by wealthy individuals and institutions – and those institutions are partly, but not entirely, the pension funds and mutual investments of the suburban saver.
Not entirely, and perhaps not even a majority; and the gains of higher mortgage rates will be subtracted from the productive economy by a privileged few.
Indeed
As far as I can see our current chancellor will be very happy to leave it to the next moron to hold this position so that he can pass the buck as is the wont of this whole administration.
“As far as I can see our current chancellor will be very happy to leave it to the next moron to hold this position so that he can pass the buck as is the wont of this whole administration.”
Just like the previous administration did. Remember the note, “Sorry, there’s no money….”
All the parties as just as bad as each other over this because none of them will take action over the issues corrupting the demand and supply of homes.
That was a joke…..
This is the problem of Keynesian economics, it has everything the wrong way round. And so consuming things and spending is what creates wealth in this model. We need a bit of Says Law to clear up this muddle. Production and saving are actually what create wealth. The clue is in the words. When you produce you have more stuff, when you consume you have less. And production must because of the laws of physics and time come before consumption. The reason why savings is good is because it improves the capital structure. But again Keynesianism ignores this vital concept.
I despair of slaves of dead economists who were wrong in the first place
Says Law? Are you in the Flat Earth Society?