Just as luck would have it, my hope of a cut price mortgage deal have taken a set back with the headline rate jumping to 4.44% from 3.69% overnight. I blame Krashy Kwarteng and his doomed economic plan.
Higher Borrowing Costs for GFF
That 0.75% increase, to put in perspective. My modest £125,000 new mortgage will cost me £463 a month in interest up from £384 or almost £80 a month or £950 a year. My current deal is 1.79% and a year ago I thought that that was too high and I could have done better (and should have). Those days of cheap borrowing are gone.
Monthly repayments are going to be around £780 a month – which is manageable but if my mortgage was twice or three times the size, I’d be worried about where the extra cash flow is going to come from.
I have a LTV (Loan to Value) of less than 50% – so I’m a decent bet I think, riskwise. An LTV of 90% gets you 4.84%. It is a bit surprising that the risk premium of going from <50% to 90% LTV isn’t higher – don’t you think?
Still Some Work To Do
My mortgage runs out at the end of the year. I was planning to arrange the new mortgage this weekend on the 1st of October. I can still do that. The extra cost isn’t a huge problem, other than it being higher figures in my spreadsheet – I’ve not much control over the situation, so I’m not going to panic about it.
But maybe the stealthier course is to wait for this panic to subside. The BOE has already said that it’ll buy long dated gilts indefinitely to hold yields down (funny how they have the money for when the economy needs it but not when people need it?)
So maybe if I McLeod it and “hold fast” I’ll get a better deal before Christmas?
Alternatively, I can go onto the SVR (which is about 5.04% at the moment but could increase by a few percent in the next few weeks (or hours!)
It’s hard to know what’s the best option. I suspect that I’ll go for fixing and early fix. Better to panic early than to panic late?
Additional Borrowing (to invest)?
I had considered borrowing extra to invest when remortgaging. This was on the assumption that even at say 3.69%, I could out perform that. Investing in an electric car or energy saving at home could produce a return better than that. Or there’s just the old fashioned investing in stocks and shares that I could do. But who knows if getting extra debt now is a good idea?
I reckon that I could get an extra £85,000 by increasing our borrowing to an LTV of 70% and still get the best rate. Now, whether the Nationwide want to lend extra to me is another question.
The big risk is that the extra £85,000 costs me £4,000 a year in extra interest and my investments don’t grow to cover that cost.
I don’t want to make myself poorer in 5 years time and who knows if the rule that stocks always go up will apply in 2028?
House Prices are Fantasy, Debt is Real
A problem for everyone is that at a cost of borrowing of 4.44%, a house that costs £500,000 (which might be a mansion in some parts of the country or a dilapidated hovel in London) costs or saves you £1,850 a month or over £22,000 a year in interest. At 6% it’s £2,500 a month or £30,000.
Given how everyone in big houses is suddenly unable to afford their heating bills of low single digit thousand pounds a year – this rocketing of interest rates is going to hurt a lot of people.
We became used to being able to borrow cheaply and took it for granted. All this cheap money made us spend more, save less and certainly not pay off the mortgage. It’s now coming back to bite us.
Paying £2k a month in interest might sound bad but if house prices start dropping at the same pace, there’ll be mad angry panic.
The Future for Money, Borrowing, Debt and House Prices
I would be shitting my pants if I was a BTL landlord right now, someone who came late to the game and is over leveraged in the hope of making a killing. If house prices are partially dictated by how much it takes to borrow at 2% and rent out to make a profit – now that common rates are twice that and the prospect of rents increasing in a cost of living crisis is laughable, it puts a real strain on house prices.
So, I would expect that in many places the value of houses will go down. Particularly if it is a large, poorly insulation, costly to run, far from amenities & car dependent luxury house. The fantasy prices of modest rural properties in the Cotswolds or wherever must be under severe pressure. If prices go back to where they were in 2020 (pre-pandemic), it would be seen as a massive correction but it’s entirely foreseeable.
Easy Way to Make More Money Now
If you need some extra cash, you can sponsor a Ukrainian family in your home. An easy £350 a month! There are lots out there and they need your help.
Good luck, GFF.