Interest rates

[Velma's Dad]

No its not!
The interest that they charge is higher than they anticipate interbank rates are going to be.

Okay point taken. But, over time, the banks are of course aiming to ensure that their received interest from loans (net of defaults) are higher than their average cost of borrowing, whether via interbank or from depositors.

 

[The Tall Luthier]

No its not!
The interest that they charge is higher than they anticipate interbank rates are going to be.
Theres currently an awful lot of people with mortgages on fixed rate deals that are paying less than interbank rates.
If that goes on too long combined with falling house prices the bank can be left loosing money on mortgages that are backed by insufficient security.
Northern Rock know a thing or two about that.

If you factor in the fact that banks are lending 30 times (might have changed) more than they hold in deposits then that becomes much less of an issue.

Thirty loans of £1 at 0.5% interest
From £1 saving deposits paying 3%
Still returns them 12% net

What killed NR was everyone of those savers wanting money when all they held was 1/30th.
Oh and that they didn’t even have the 1/30th as they gambled it all on repackaged-repackaged-repackaged mortgage deals.

Again the deposit:lending ratio may have changed and might not be thirty.

 

[andyinluton]

Thirty loans of £1 at 0.5% interest
From £1 saving deposits paying 3%
Still returns them 12% net

Surely in that case you've got 30 loans paying them .5% and they've borrowed the money from a saver at 3% they are loosing 2.5% on every loan? on top of that they have their overheads etc.

 

[two-saabs]

Your assumption isn't quite right.

Firstly, there's not a one-to-one relationship between the amount the bank has borrowed, and the amount it has lent out at any time. Using the concept of "fractional reserve banking" the bank creates new money out of nowhere when it creates a loan account/mortgage. To meet banking regulations, it only needs to take deposits from savers on a smaller amount to stay within its regulated reserve or capital requirement levels.

That's how banks create new credit virtually out of thin air, which then enables people to get credit to buy stuff, especially assets like houses, which increases what people are willing and able to offer, for a relatively fixed base of those assets, and hence balloons debt in the economy.

Banks are constantly tuning their reserves by borrowing and lending between each other, and with the central bank. What is clear is that the interest rate they charge you is always higher tan the interbank rates - that's how they cover their credit risk (ie you might stop paying your mortgage) and of course generate profit.

To your specific question: when the bank imposes higher interest rates on mortgage holders, it is pocketing the extra interest you have to pay. But against that the bank is likely to be having to pay higher rates to borrow (part of) that back on the interbank markets if the base rate has risen, and also its risk levels may have changed so it might anticipate higher mortgage defaults.

I'm not a banker or an economist so if there's one on here maybe they can give a better answer.

Seems pretty good to me

 

[The Tall Luthier]

Surely in that case you've got 30 loans paying them .5% and they've borrowed the money from a saver at 3% they are loosing 2.5% on every loan? on top of that they have their overheads etc.

You have one saver you owe 3% so 3p

You have 30 savers who owe you 0.5% so 30 x 0.5p = 15p

You’ve just made 12p

I think that’s why they say, the banker can never lose!

 

[Amarillo]

Base rates rise by over 33% percent from 2.25% to 3%, yet Barclays slashes its Standard Variable Rate by 0.25 percentage points from 6.74% to 6.49%.

How does that work!?

 

[Wildcamper]

Interest rates of 3%! Big deal. We bought our first house at the end of the 1970s and then interest rates rose to 17%. We just got on with life.

 

[Azteccamper]

Interest rates of 3%! Big deal. We bought our first house at the end of the 1970s and then interest rates rose to 17%. We just got on with life.

The 70’s - a different era and totally irrelevant to now on so many levels - good and bad.

 

[soulstyledevon]

Interest rates of 3%! Big deal. We bought our first house at the end of the 1970s and then interest rates rose to 17%. We just got on with life.

The average house price is 65 times higher today than in 1970 but average wages are only 36 times higher.
You had it easy in the 1970s, compared to today.

 

[GrannyJen]

The average house price is 65 times higher today than in 1970 but average wages are only 36 times higher.
You had it easy in the 1970s, compared to today.

Don't ever tell me that.

In the 1970's I has no ambition to buy a house so your equatable comparison is irrelevant.

 

[The Tall Luthier]

Interest rates of 3%! Big deal. We bought our first house at the end of the 1970s and then interest rates rose to 17%. We just got on with life.

They sometimes say that if Baby Boomers and Gen X people voted in such a way to make their grandchildren’s lives better, and not their own, that their grandchildren’s lives would in fact get ……. better.

No one is trying to deny that your life experience was easy all the time, but a little compassion for others who facing significant problems would be welcomed.

 

[GrumpyGranddad]

The average house price is 65 times higher today than in 1970 but average wages are only 36 times higher.
You had it easy in the 1970s, compared to today.

Not quite that simple. The cost of, for example, household goods and food as a proportion of income were significantly higher back then:-

‘In the 1950s we spent a third of our income on food shopping, but in 1974 this had gone down to 24%. By 2016 food shopping accounted for just 10.5% of our income’.

 

[Amarillo]

Interest rates of 3%! Big deal. We bought our first house at the end of the 1970s and then interest rates rose to 17%. We just got on with life.

1990 I bought my flat with a £40,000 mortgage and mortgage rate of 15.75%. £525 per month interest.

21 years later Clare and I bought a house together with a £228,000 mortgage and a mortgage rate of 2.49%. £473 per month interest.

 

[Amarillo]

Interest rates up to 3.5%.

A 35 fold increase in a year.

 

[The Merle]

Interest rates up to 3.5%.

A 35 fold increase in a year.

Shame the banks don’t pass on the saving rates as quick or on par unless you lock in.

 

[soulstyledevon]

I haven’t had a look yet and done the sums.
But here we’re. 6 months later and another rate hike…
Yikes….!!!

 

[GrumpyGranddad]

I haven’t had a look yet and done the sums.
But here we’re. 6 months later and another rate hike…
Yikes….!!!

Yes painful for some @soulstyledevon but for those of us in later life who’ve ‘enjoyed’ almost zero rates on cash investments for a decade it’s welcome. My kids have fixed their mortgages for a few years so no pain for them just yet. Difficult to predict how these rate rises will further stress some banks globally.

 

[Amarillo]

I haven’t had a look yet and done the sums.
But here we’re. 6 months later and another rate hike…
Yikes….!!!

5 1/2 years remaining of our ten year fixed rate at 2.49%.

But we have three BTL fixed rate mortgages ending 30 October. I pray that by then we will be in a Brexit induced deep recession and rates will have tumbled to near zero again (my pension is final salary so won’t be affected if stock markets tumble).

 

[calibeach76]

Boomers have ridden the economic system by and large to their benefit and everyone else's detriment and in many cases have pulled up the drawbridge. Boomers are my parents generation and no generation since or possibly ever again will have it so good and so easy. I can only hope that if by my retirement I am as comfortable then I will share the wealth accrued to ensure my children and grandchildren see the benefits of my wealth.

 

[calibeach76]

The average house price is 65 times higher today than in 1970 but average wages are only 36 times higher.
You had it easy in the 1970s, compared to today.

100% agree

 

[Dave Wickham]

Boomers have ridden the economic system by and large to their benefit and everyone else's detriment and in many cases have pulled up the drawbridge. Boomers are my parents generation and no generation since or possibly ever again will have it so good and so easy. I can only hope that if by my retirement I am as comfortable then I will share the wealth accrued to ensure my children and grandchildren see the benefits of my wealth.

You may need a bent accountant to get your money offshore and away from the sticky hands of HMRC. Or become a Tory politician where tax avoidance is de-rigueur

 

[Amarillo]

You may need a bent accountant to get your money offshore and away from the sticky hands of HMRC. Or become a Tory politician where tax avoidance is de-rigueur

If you have additional property there are still some nice little wheezes to avoid tax.

Remortgage your buy-to-let property every five years to 60% or 75% to take out 60% or 75% of the increase in value *tax free*. And as a bonus the taxman will return to you by way of a tax credit 20% of your additional mortgage interest.

E.g. £1.5m property portfolio in 2018 (£900,000 mortgage; £600,00 equity). £1.9m in 2023.

Remortgage to £1.14m taking a tax free cash bonanza of £240,000.

There will be a cost of extra interest, 4.79% is available on a five year fix interest only BTL, so £57,480 over five years but the philanthropic taxman will return £11,496 to you.

So over five years you will have netted over £194,000.

Of course this is dependent on property prices continuing to rise, in this example at ~5% per year. Property prices may well fall.

 

[calibeach76]

Brilliant summation

 

[Wildcamper]

100% agree

I don't recall interest rates of 15% and a three day week making life easy!

 

[calibeach76]

I don't recall interest rates of 15% and a three day week making life easy!

Where's my violin...