tag:theconversation.com,2011:/nz/topics/mortgages-31888/articlesMortgages – The Conversation2024-02-14T17:07:42Ztag:theconversation.com,2011:article/2215442024-02-14T17:07:42Z2024-02-14T17:07:42ZGeneration Z may not need mortgages, here’s why<figure><img src="https://images.theconversation.com/files/575630/original/file-20240214-22-ieqy9q.jpg?ixlib=rb-1.1.0&rect=5%2C20%2C3493%2C2239&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/es/image-photo/young-happy-lesbian-couple-hugging-laughing-1896484951">Ground Picture/Shutterstock</a></span></figcaption></figure><p>Ask many Millennials – the generation currently in their late 20s to early 40s – about the possibility of home ownership and they will probably laugh in your face. The idea of getting a mortgage with just their own income is often unthinkable, and those who do own property often have an uncommonly early inheritance to thank.</p>
<p>While housing crises rage across Europe, many members of Generation Z – those born after the year 2000 – may soon find that the shoe is on the other foot. By analysing mortgage trends and other data, my research has predicted a gradual shift away from long term mortgage commitments among this generation.</p>
<p>Inheritances will play a key part in this change. Slowing population growth, smaller families, and a concentration of property ownership in the ageing Baby Boomer generation (born between 1946 and 1964) mean that inheritance rates have been climbing year on year. </p>
<p>Generation Z therefore stands to benefit from Europe’s declining birth rate, one of the lowest in the world at <a href="https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Fertility_statistics">1.53 children per woman</a>. Put simply, there will be fewer young people to inherit houses, and more houses for them to inherit.</p>
<h2>Mortgages: an increasingly unattractive prospect</h2>
<p>Getting a mortgage is daunting at the best of times, as banks require savings, income, stable employment and a hefty deposit. If you meet these criteria, you are then locked into, on average, a 25-year commitment. </p>
<p>In a labour market characterised by <a href="https://feps-europe.eu/publication/605-living-with-uncertainty-the-social-implications-of-precarious-work/">temporary jobs and low, stagnating wages</a>, many people will struggle to ever sign a mortgage, let alone pay one off. The prospect of getting one is especially unappealing at a time when <a href="https://www.imf.org/en/Publications/WP/Issues/2023/03/24/European-Housing-Markets-at-a-Turning-Point-Risks-Household-and-Bank-Vulnerabilities-and-531349">rising mortgage rates are driving the cost of living up</a> in Europe and beyond. This panorama is already affecting <a href="https://www.forbes.com/sites/jackkelly/2023/09/29/gen-z-faces-financial-challenges-stress-anxiety-and-an-uncertain-future/">Generation Z’s attitude to long term milestones</a> such as buying a home.</p>
<p>The fact that <a href="https://www.ft.com/content/c585cc68-880c-44af-95e4-8be50676b095">fewer mortgages are being signed</a> across the continent is therefore unsurprising, especially given a <a href="https://www.ey.com/en_gl/news/2023/12/decade-low-european-mortgage-growth-forecast-this-year-and-next-as-high-borrowing-costs-and-a-weak-economy-drive-down-demand">steep rise in interest rates</a> and soaring property prices. This decline seems set to continue into the long term, for a number of reasons.</p>
<h2>Home ownership in Europe today</h2>
<p>In the European Union, the average age at which people first acquire property is 34. The average mortgage duration is 25 years, meaning payments are typically completed by the age of 59, just before retirement age (65 in most EU member states).</p>
<p>As of 2022, 69.1% of Europeans owned their home, but only <a href="https://www.ecb.europa.eu/pub/economic-bulletin/focus/2021/html/ecb.ebbox202101_05%7Ea872597edd.en.html">24.7% had mortgages</a>. This does <a href="https://www.statista.com/statistics/957803/homeowners-with-and-without-an-outstanding-mortgage-in-eu-28-per-country/">vary widely</a> across the continent, and there is little correlation between ownership rates and the number of active mortgages. </p>
<p>In some Northern European countries, the number of mortgages is actually rising. In the Netherlands, for example, <a href="https://www.dnb.nl/en/current-economic-issues/housing-market/hight-mortgage-debts-in-the-netherlands-risks-and-solutions/">61% of homeowners currently have a mortgage</a>.</p>
<p>In contrast, this percentage is far lower in countries like Italy, where only <a href="https://www.statista.com/statistics/957803/homeowners-with-and-without-an-outstanding-mortgage-in-eu-28-per-country/">14.6%</a> of homeowners have a mortgage. This disparity may be due to the more common use of liquid funds, or stronger, more longstanding traditions of inheriting property in certain countries.</p>
<h2>Spain: a case in point</h2>
<p>We can take Spain as an example of the changes that are already underway. It is above average in life expectancy and rates of home ownership (especially among older generations): the average Spaniard first purchases property at age 41, and receives an inheritance at 51. </p>
<p>The number of inheritances, however, is reaching new highs year on year. From 2021 to 2022 the number of homes inherited in Spain rose by <a href="https://www.ine.es/jaxiT3/Datos.htm?t=6154">3.7%</a>, with over 17,800 homes inherited per month within its borders. </p>
<p>With only a 10-year gap, on average, between signing a mortgage and receiving an inheritance, the average Spanish person may see little benefit in tying themselves to a variable, potentially volatile 25-year loan.</p>
<h2>Leaving the family home</h2>
<p>The ongoing surge in property inheritance shows no signs of slowing, and is big enough to potentially decrease the long-term demand for mortgages. However, the value of inheritances varies widely across different countries and wealth distributions, and it is difficult to make predictions for all of Europe. </p>
<p>There is also huge variation in factors such as <a href="https://ec.europa.eu/eurostat/web/products-eurostat-news/w/ddn-20230904-1">the age of leaving the family home</a>. Southern Europe is generally higher in this regard, with adults typically staying with their parents until age 30.3 in Spain, 30.7 in Greece and 30 in Italy. </p>
<p>In Finland, on the other hand, people typically leave home at age 21.4, with similarly low figures across Scandinavia. France sees adults move out at 23.4, and Germany at 23.8. According to Eurostat data, many of these average ages showed long-term increases between 2012 and 2022.</p>
<p>However, higher youth independence does not directly correlate with more mortgage signings. <a href="https://www.ine.es/jaxiT3/Tabla.htm?t=3200&L=0">Spain’s staggering drop of 62.54%</a> in new mortgages from 2007 to 2023 is reflected in data from across Europe. From 2022 to 2023, <a href="https://www.nbb.be/fr">Belgium recorded a 33.8% decrease</a>, and between 2021 and 2022 <a href="https://www.banque-france.fr/fr/publications-et-statistiques/statistiques/panorama-des-prets-lhabitat-des-menages">France has witnessed an approximate decrease of 47.49%</a>. </p>
<p><a href="https://economic-research.bnpparibas.com/pdf/fr-FR/marche-immobilier-residentiel-zone-euro-epreuve-normalisation-monetaire-17/01/2024,49230">Annual data from the European Central Bank, released in November 2023,</a> also shows annual decreases of 61% in Slovakia, 57% in Austria, 40% in Luxembourg, and 23% in Estonia. Across Europe as a whole, the number of new housing loans dropped by 32% last year. </p>
<h2>Impacts on Generation Z</h2>
<p>Though they will face plenty of other problems, <a href="https://www.researchgate.net/publication/335555065_Precarious_work_and_labour_regulation_in_the_EU_current_reality_and_perspectives">such as securing stable employment contracts</a>, housing might not be the primary concern for much of Generation Z in the future.</p>
<p>An ageing baby boomer population means that massive amounts of property are already being passed down among the wealthiest households: as far back as 2015, inheritances on average corresponded to <a href="https://www.oecd-ilibrary.org/sites/e2879a7d-en/index.html?itemId=/content/publication/e2879a7d-en#:%7E:text=Inheritance%20and%20estate%20taxes%20are,taxes%20on%20donors'%20overall%20estates.source">$196,247 per person in the wealthiest 20% of OECD countries</a>. This figure had already increased by 50% in less than a decade. </p>
<p>This will benefit Millennials to a certain extent, but with <a href="https://www.americansurveycenter.org/the-lonely-childhood-of-generation-z/">fewer siblings</a>, many wealthier members of Generation Z might not need to divide inheritances from parents who often own multiple properties. This outlook, coupled with the conditions for accessing a mortgage in an inhospitable job market, will raise a simple question for much of Generation Z: Why take on the risk, long term commitment and extra cost of a mortgage if I don’t have to?</p><img src="https://counter.theconversation.com/content/221544/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geoffrey Ditta no recibe salario, ni ejerce labores de consultoría, ni posee acciones, ni recibe financiación de ninguna compañía u organización que pueda obtener beneficio de este artículo, y ha declarado carecer de vínculos relevantes más allá del cargo académico citado.</span></em></p>Europe’s ageing population means that Generation Z stands to inherit huge amounts of property in the coming years, resulting in reduced demand for mortgages.Geoffrey Ditta, Geoffrey Ditta Ph.D. Profesor de Economía y Negocios Internacionales. Director del Máster Universitario en Internacionalización de Empresas. Facultad de Economía y Empresa, Universidad NebrijaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2213462024-01-23T13:57:58Z2024-01-23T13:57:58ZCould taxing land more than income fix the UK housing crisis?<figure><img src="https://images.theconversation.com/files/570054/original/file-20240118-28-g7dvv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/brown-grass-near-body-of-water-during-daytime-sHwG19w7ysY">Giulia Hetherington|Unsplash</a></span></figcaption></figure><p>Fifty years ago, a group of activists <a href="https://www.theguardian.com/world/2024/jan/17/centre-point-occupation-housing-homelessness-1974-anniversary">occupied</a> London’s Centre Point Tower in a fabled episode of direct action on housing. At the time, in January 1974, England was beset by rising homelessness and too many empty homes. One of the protesters, Ron Bailey, recently <a href="https://www.theguardian.com/society/2024/jan/17/fifty-years-on-could-we-see-another-centre-point-style-housing-protest">pointed out</a> that this situation “was pretty much like now”.</p>
<p>In fact, the housing crisis is worse now than it was then. In 1974, councils were still building public housing. And house prices and rents were not running as far ahead of earnings as they are today. In the 20 years to 2022, <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/datasets/ratioofhousepricetoresidencebasedearningslowerquartileandmedian">median prices have risen</a> from five to eight times earnings across England, and from seven to 13 times in London.</p>
<p>Quite what is driving this housing cost crisis is a matter of debate. Scholars and politicians agree that supply needs to increase, across the private and, particularly, the public sectors. However, the shortfalls in private newbuild housing – which are often local or sub-regional – do not explain why housing costs so far exceed people’s ability to cover them. </p>
<p>Along with my colleagues <a href="https://profiles.ucl.ac.uk/47330-phoebe-stirling">Phoebe Stirling</a> and <a href="https://www.ucl.ac.uk/bartlett/planning/andrew-purves-">Andrew Purves</a>, I <a href="https://journals.sagepub.com/doi/full/10.1177/09697764221082621">have shown</a> that this disconnect is due to the economic shift, in the latter part of the 20th century, that saw housing transformed from a home into an asset. </p>
<p>Economists, often inspired by the work of <a href="https://www.economist.com/free-exchange/2015/04/01/why-henry-george-had-a-point">Henry George</a>, have long proposed a solution to this problem: a regular tax on land values. Balanced by lower taxes on work, such a levy could play a significant role in easing the housing cost crisis confronting UK families. </p>
<figure class="align-center ">
<img alt="Terrace houses on a London street." src="https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/570070/original/file-20240118-24-old0n0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CAPTION.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/a-row-of-brick-houses-with-white-windows-DRsaC2d822E">Collins Independant|Unsplash</a></span>
</figcaption>
</figure>
<h2>How housing became a financial asset</h2>
<p>At the root of the housing cost crisis is the transformation of housing into a private asset in the 20th century. Successive UK governments worked with financial lenders to activate demand for private housing and shrink the role of the state as direct provider of council homes.</p>
<p>Reduced credit controls in the 1970s, and further banking deregulations, made it easier for families to secure bigger mortgage loans on easier terms and with smaller incomes. Banks and building societies were encouraged to offer a wider range of products, culminating in buy-to-let mortgages <a href="https://www.campionssolicitors.co.uk/history-of-buy-to-let-mortgages">in 1996</a>.</p>
<p>House price growth outpaced underlying inflation and UK housing became a magnet for domestic and international investment. It was now an asset: better than a pension, and the focus of families’ financial aspirations across generations.</p>
<p>UK governments came to see house prices as a barometer for the health of the economy and a political goal. The underlying value of land on which housing sits is now the foundation for the UK economy.</p>
<figure class="align-center ">
<img alt="A row of buildings reflected in a body of water." src="https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/570071/original/file-20240118-23-mp95i5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CAPTION.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/brown-concrete-building-near-body-of-water-during-daytime-UD4RP6eqr7Y">Jonny Gios|Unsplash</a></span>
</figcaption>
</figure>
<h2>Why we should refocus tax on land values</h2>
<p>Homeowners have a “beneficial interest” – an economic stake – in land values, which may rise without any investment or improvement by the owner. The removal of regular tax on that beneficial interest, via the <a href="https://www.legislation.gov.uk/ukpga/1963/25/part/II/chapter/II/crossheading/abolition-of-schedule-a-tax-and-taxation-of-rents-etc/enacted">1963 Finance Act</a>, was one of the ways that government activated demand for private housing.</p>
<p>Reducing tax on earnings and, instead, returning to some form of a regular land value tax would help to solve the housing crisis. This land value tax would be fixed to ownership of any housing and distinct from council tax, as is the case in much of Europe and across the US.</p>
<p>This would increase net workplace earnings. It would also suppress house prices. The relationship between the two, and the extent and speed of any price adjustment, would depend on the balance of tax liability (between earnings and land value) and how quickly the shift happened: too fast and the market would go into shock. </p>
<p>Such a change has the potential to keep people, the over-50s in particular, in the job market. The financial reward from work would increase while the reward from just owning housing, and benefiting from rising land values, would decrease.</p>
<p>It would also make it nonsensical to leave homes empty. Owners would face a tax liability that could either be met by rental income from the building or avoided by selling up. </p>
<p>If taxes on land were to become a bigger part of a household’s liability, then keeping a second home, for amenity or investment, would effectively double that liability.</p>
<p>By increasing the price of luxury or speculative property ownership in this way, taxing land values would help to ensure that land, and the housing on it, is put to productive use, in the sense of being fully occupied. </p>
<p>Overall, it would reduce wealth inequalities centred on housing and restore the function of housing as home, as opposed to asset. </p>
<figure class="align-center ">
<img alt="A colourful row of terrace houses in England." src="https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=441&fit=crop&dpr=1 600w, https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=441&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=441&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=554&fit=crop&dpr=1 754w, https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=554&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/570073/original/file-20240118-29-he3dfd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=554&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CAPTION.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/multicolored-concrete-houses-h95mT1m9Zzs">Bethany Opler|Unsplash</a></span>
</figcaption>
</figure>
<h2>Why a land value tax is fair</h2>
<p>A regular tax on beneficial interest in land is not an attack on aspiration. It is a means of ensuring that families have affordable access to the housing they need, by re-centering the economy away from housing-based rentierism (making money solely by owning housing).</p>
<p>Land values are created by the agglomeration of human activity. House prices (of which land values are the major component in the highest value areas) increase as cities grow, economies strengthen, and infrastructure is upgraded. Taxing this unearned rent (land values) is therefore fairer than taxing work.</p>
<p>Lots of people would of course object. Private landlords would seek to recover land tax losses through higher building rents. This would be tempered, however, by the release of empty homes to the sale and rental markets. Families would find it easier to buy the homes they need without such a strong asset motive for ownership. </p>
<figure class="align-center ">
<img alt="Buildings on a junction in a small English town." src="https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/570072/original/file-20240118-23-xk277k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">CAPTION.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/brown-and-white-concrete-building-during-daytime-Z9ox5bWHfpg">Liv Cashman|Unsplash</a></span>
</figcaption>
</figure>
<p>The wider rentier economy, built on untaxed land values, would be floored by a comprehensive taxing of ground rents. But replacing high-land values and low productivity with a focus on productive investment, employment growth, higher rewards from work and more broadly shared prosperity, would be a positive shift. </p>
<p>As the economy restructures away from rentierism, lower land values would make it easier for councils, once again, able to build homes, including in new towns. </p>
<p>Fifty years ago, housing campaigners risked prison to highlight how desperately people needed decent places to live. Without a significant shift away from the <a href="https://rgs-ibg.onlinelibrary.wiley.com/doi/abs/10.1111/j.1475-5661.2009.00366.x">extractive</a> economic model that spawned the housing crisis, the country will continue to be blighted by empty homes and spiralling housing costs.</p><img src="https://counter.theconversation.com/content/221346/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nick Gallent has, in the past, received funding from UKRI, various charitable funders, including RICS, RTPI and housing groups, and from government. He is a Trustee of the Town and Country Planning Association and a Fellow of both the Royal Town Planning Institute and the Royal Institution of Chartered Surveyors </span></em></p>Transferring the tax burden away from people’s earnings and back on to the value of any land that they own would reframe housing as a home, not an asset.Nick Gallent, Professor of Housing and Planning, The Bartlett School of Planning, Faculty of the Built Environment, UCLLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2181182024-01-03T20:27:31Z2024-01-03T20:27:31ZThe cost-of-living crisis is hitting hard. Here are 3 ways to soften the blow<figure><img src="https://images.theconversation.com/files/562608/original/file-20231130-17-o8fryb.jpg?ixlib=rb-1.1.0&rect=0%2C24%2C8256%2C5462&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>As our wallets feel the strain from the cost-of-living crisis, many of us are looking for ways to soften the blow.</p>
<p>While everyone’s circumstances are different, and ideally you should seek help from an accredited financial adviser, there are some tried and true ways to work out where all your money is going and why.</p>
<p>Here are three practical tips to reduce the impact of the cost-of-living increases, and stretch every hard-earned dollar.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1730013781751718365"}"></div></p>
<h2>1. Hunt for a better loan rate</h2>
<p>For many households, the biggest hit comes from the mortgage, so start there.</p>
<p>Even a modest 0.5% reduction can translate into substantial savings. Call your bank today and just ask for rate reduction. If the answer is no, consider shopping around for a different lender.</p>
<p>Your loyalty to your current lender might be costing you more than you realise. Banks often reserve their most attractive rates for new customers, leaving long-time customers paying higher-than-necessary interest.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman looks at her phone while sitting in a chair." src="https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562601/original/file-20231130-23-eyet8z.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It’s OK to shop around for a different lender.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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</figure>
<p>Even if your bank does agree to a rate reduction, explore the market anyway. There is a range of free rate-comparison websites, or you can directly check individual bank websites.</p>
<p>If you find a lender offering a better rate, you might consider calling the competing bank to ask about switching your mortgage to them. </p>
<p>Or, you might seek assistance from a mortgage broker, who can guide you through the process of securing a better deal (just remember they often take <a href="https://www.canstar.com.au/home-loans/mortgage-brokers-fees/">commissions</a> from lenders).</p>
<p>Tread carefully and factor in any exit fees or charges from your current lender. Refinancing isn’t without risk, so a thorough cost-benefit analysis is important before making the switch.</p>
<p>Also consider the value of features such as <a href="https://moneysmart.gov.au/glossary/offset-account">offset accounts</a>. An offset account, linked to your home loan, allows you to deposit money such as your salary and savings. This money is then “<a href="https://www.rba.gov.au/publications/smp/2015/aug/box-e-offset-account-balances-and-housing-credit.html">offset</a>” against your home loan balance. </p>
<p>That means you only pay interest on the outstanding amount (the loan minus whatever salary and savings you put in the offset). This can accelerate loan repayment and reduce interest costs.</p>
<p>Keep in mind that offset accounts are typically only available with variable interest rates. Offset accounts work best if you have considerable savings to put into the offset account that outweigh the additional fees and charges attached to offset accounts. </p>
<h2>2. Trim your expenses and uncover hidden savings</h2>
<p>It’s time to become a budget detective, identifying and cutting down on non-essential costs that might be quietly draining your wallet.</p>
<p>Take a close look at those recurring memberships and subscriptions. How often do you actually use that gym membership or streaming service?</p>
<p>Many banking apps have handy spending tracking features to help you set realistic budget goals for each spending category. </p>
<p>According to the <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/selected-living-cost-indexes-australia/latest-release">Australian Bureau of Statistics</a>, insurance and financial services are among the top risers in living cost indexes (which measure the price change of goods and services and its effect on living expenses). So search comparison websites for better insurance premiums. </p>
<p>Australia’s insurance market is competitive, and you can often get discounts by bundling your insurances together (for example, having your home and contents insurance with the same company that also provides your car insurance). However, don’t shy away from exploring different insurers for potentially better value.</p>
<p>Don’t overlook energy costs, either. Use comparison websites like <a href="https://www.energymadeeasy.gov.au/">Energy Made Easy</a> (or, if you’re in Victoria, the <a href="https://compare.energy.vic.gov.au/">Victorian Energy Compare</a> site) to find more cost-effective energy plans. Stay updated on rebates and concessions via the federal government’s <a href="https://energy.gov.au">Energy.gov.au</a> site, to ensure you’re maximising your entitlements.</p>
<p>Use less energy, if you can. Small adjustments can make a significant dent in your bills. And for fuel costs, find websites and applications that allow you to lock in the lowest prices in your area.</p>
<p>If you’re renting, ask yourself whether moving to a cheaper suburb or a cheaper home is an option.</p>
<p>Many people use cashback sites like Cashrewards and ShopBack to accrue cashback incentives.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman does exercise in front of the TV." src="https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=325&fit=crop&dpr=1 600w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=325&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=325&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=409&fit=crop&dpr=1 754w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=409&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/562883/original/file-20231201-29-3rsnw1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=409&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Do you get good value from your gym membership or could you save by exercising at home?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/fitness-online-stay-home-workout-class-1680844543">Shutterstock</a></span>
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<h2>3. Maximise returns and tackle high-interest debts</h2>
<p>While rising interest rates might make your mortgage climb, it also means high interest on your savings.</p>
<p>Consider exploring high-yield savings accounts; with current interest rates, you could potentially earn around 5.5% with a bank savings account. Many people set up recurring transfers to help them stick to savings goals, increase deposits and maximise interest earnings.</p>
<p>For those wrestling with high-interest debts such as credit cards or personal loans, prioritise settling outstanding balances to minimise interest payments.
It can be hard to escape the long-term repercussions (such as a <a href="https://theconversation.com/payday-lending-trap-requires-a-credit-supply-rethink-39311">poor credit score</a>) of defaulting on <a href="https://www.sydney.edu.au/news-opinion/news/2022/09/21/researchers-uncover--pecking-order-of-defaults--as-belts-tighten.html">high-interest loans</a>.</p>
<p>And approach buy-now, pay-later services with extreme caution. They may seem tempting but the <a href="https://onlinelibrary.wiley.com/doi/10.1111/acfi.13100">debts can quickly add up</a>.</p>
<p>And if you need more help, contact the government’s free National Debt Helpline on 1800 007 007.</p><img src="https://counter.theconversation.com/content/218118/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ama Samarasinghe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Small adjustments can make a significant difference.Ama Samarasinghe, Lecturer, Financial Planning and Tax, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2191532024-01-02T12:24:35Z2024-01-02T12:24:35ZWhy you may not be able to get on the housing ladder or buy a bigger home in 2024<figure><img src="https://images.theconversation.com/files/566826/original/file-20231220-29-lvxg0r.jpg?ixlib=rb-1.1.0&rect=48%2C8%2C5399%2C3540&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/young-couple-sitting-on-sofa-778754047">Billion Photos/Shutterstock</a></span></figcaption></figure><p>Five million more UK households could feel the effects of recent interest rate increases in coming years. Roughly the same number have already been forced to remortgage since the recent spate of rate rises began in 2021, according to the Bank of England’s latest <a href="https://www.bankofengland.co.uk/financial-stability-report/2023/december-2023">Financial Stability Report</a>. These borrowers have come off historically low fixed rates and are now often paying hundreds more per month in mortgage repayments.</p>
<p>Households on a fixed rate mortgage deal are not impacted by high interest rates until they remortgage. Out of the 1.4 million <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/howincreasesinhousingcostsimpacthouseholds/2023-01-09">households that remortgaged</a> in 2023 alone, most were previously on rates of less than 2%. In contrast, new two-year fixed rate mortgages peaked at 6.86% in July although in December the rate fell to <a href="https://www.bbc.co.uk/news/business-67636575">just below 5%</a>.</p>
<p>In addition to the fact that <a href="https://www.ukfinance.org.uk/news-and-insight/press-release/uk-finance-mortgage-data">around a fifth</a> of borrowers are on mortgages that track the base rate anyway, it’s surprising that the housing market has not been more deflated as borrowers struggle to borrow enough to get on or move up the property ladder. </p>
<p>The value of the average UK house price fell by £3,000 over the year to October 2023, according to <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/october2023">the latest government figures</a>. This means the current UK average house price of £288,000 dropped by 1.2% in the 12 months to October 2023, versus an annual decrease of 0.6% the previous month.</p>
<p>Arrears have been creeping up, of course, but they’re <a href="https://www.ft.com/content/c336a7a2-e3d6-436d-acc1-577eb5ec9d6f">not particularly high</a> in historic terms. Part of the reason for this is that around <a href="https://www.lancasterpropertyblog.co.uk/33-of-households-in-the-uk-own-their-home-outright-what-percentage-is-it-in-lancaster/#:%7E:text=The%202021">a third of homeowners</a> in the UK own their homes outright. The rise in mortgage rates has undoubtedly affected discretionary income of many households though, in some cases severely, even if has not yet led to arrears. </p>
<p>Inevitably, as households struggle with their finances, future plans to move have been put on hold. Indeed, the number of residential transactions in the UK has <a href="https://www.gov.uk/government/statistics/monthly-property-transactions-completed-in-the-uk-with-value-40000-or-above">fallen from 2022 levels</a> and is now below 2021 levels. This is important because <a href="https://www.emerald.com/insight/content/doi/10.1108/JERER-11-2022-0037/full/html">the most significant dynamic</a> in the housing market is people’s desire and ability to upgrade. And if people don’t move up the ladder, there is no room for others to clamber on to the first rung.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/interest-rates-have-stopped-rising-but-2023-hikes-could-still-cause-recession-for-some-economies-219857">Interest rates have stopped rising, but 2023 hikes could still cause recession for some economies</a>
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<h2>How the economy affects the housing market</h2>
<p>UK housing market woes over the last year have been underpinned by uncertainty about the economy as it spluttered on the verge of a recession, as well as very high inflation. Property demand was dampened as wage rises for many did not keep pace with inflation. High inflation led to rising interest rates after more than a decade of low rates. In September 2022 the UK bank base rate was only 1.75%, but eight subsequent increases brought it to 5.25% by August 2023.</p>
<p>In 2024, household finances are likely to improve in the very short term as wages rise above inflation for some. This will combine with a fall in national insurance in January and possibly even income tax cuts in the pre-election budget in March, to buoy up bank accounts a little. </p>
<figure class="align-center ">
<img alt="Row of terraced houses, going downhill." src="https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4015%2C2611&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=390&fit=crop&dpr=1 600w, https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=390&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=390&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=489&fit=crop&dpr=1 754w, https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=489&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/566822/original/file-20231220-25-3bpn3o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=489&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">UK house prices are unlikely to rise much in 2024.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/row-typical-english-terraced-houses-409994218">Jozef Sowa/Shutterstock</a></span>
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<p>On the other hand, <a href="https://www.ofgem.gov.uk/energy-price-cap#:%7E:text=The%20energy%20price%20cap%20is,and%20pay%20by%20Direct%20Debit.">energy costs are set to rise</a> in January and inflation is expected to fall only slightly to just over 3% from its current 4.7%. Interest rates are not likely to be cut significantly in 2024 and currently look set to be <a href="https://www.bankofengland.co.uk/monetary-policy-report/2023/november-2023">around 4%</a> by the <a href="https://obr.uk/docs/dlm_uploads/E03004355_November-Economic-and-Fiscal-Outlook_Web-Accessible.pdf">end of the year</a>. UK economic growth is likely to remain non-existent and living standards will generally continue to fall substantially because of recent rapid consumer price inflation.</p>
<p>So, it’s difficult to see any significant changes to housing market trends next year as 2023’s financial struggles look set to continue. Many households will not be in a position to upgrade their homes, especially those still on low fixed-rate mortgages that are due for renegotiation during 2024. Subdued demand for homes will probably keep property prices lower.</p>
<p>Some pent up demand will be realised and lower interest rates could feed into house prices in the second half of the year, if the Bank of England starts cutting rates again. At best, housing market activity will increase and prices will rise, but probably only in line with inflation.</p><img src="https://counter.theconversation.com/content/219153/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Colin Jones does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>UK house prices are unlikely to rise much in 2024 as interest rate rises continue to bite.Colin Jones, Professor of Real Estate, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2199662023-12-21T21:54:53Z2023-12-21T21:54:53ZIt’s not just housing: the ‘bank of mum and dad’ is increasingly helping fund the lives of young Australians<figure><img src="https://images.theconversation.com/files/566790/original/file-20231220-15-irhy2g.jpg?ixlib=rb-1.1.0&rect=35%2C8%2C5955%2C3979&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/child-congratulations-graduates-business-man-house-713443921">Shutterstock</a></span></figcaption></figure><p>Much has been made of the increasing presence of the “bank of mum and dad” in the lives of Australians. </p>
<p>We know financial support from parents to adult children is increasingly used for entering the <a href="https://www.ahuri.edu.au/research/final-reports/395">housing market</a>. </p>
<p>But our new <a href="https://doi.org/10.1177/14407833231210956">research</a> shows parents are also helping their young adult children in other ways, including with meeting everyday expenses. We’ve gained new insights into who is receiving support from parents and what it’s used for.</p>
<p>So what does this look like in practice, and what does it mean for intergenerational inequality in Australia?</p>
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<strong>
Read more:
<a href="https://theconversation.com/how-housing-made-rich-australians-50-richer-leaving-renters-and-the-young-behind-and-how-to-fix-it-195189">How housing made rich Australians 50% richer, leaving renters and the young behind – and how to fix it</a>
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<h2>Parental financial support becoming commonplace</h2>
<p>We have surveyed a diverse group of young Australians for almost <a href="https://education.unimelb.edu.au/life-patterns">18 years</a>, since they were in year 12 in 2006. This has allowed us to follow the trajectory of a cohort of millennials as they have transitioned to adulthood. </p>
<p>One of the areas we ask about is their sources of financial support. This includes their own income, savings and investments, and government support, but also gifts, loans and other transfers from their family. </p>
<p>Our findings show that financial support from family – typically parents – has become important for this generation well into young adulthood. </p>
<p>This support from family was very common for our participants when they were in their late teens. Perhaps more surprisingly, for many this support continued into their 20s and, for a significant minority, into their late 20s and beyond. </p>
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<p>So is it only rich parents providing this assistance? Turns out, not really. Our results show young adults from diverse socioeconomic backgrounds get financial help. </p>
<p>Surprisingly, the educational level and occupation status of their parents did not predict whether our participants were receiving support. Parents with higher education and in managerial or professional careers are providing financial help. But so too are parents of more modest means, even if the amount of support they can provide clearly differs.</p>
<h2>It’s not just about houses</h2>
<p>Our participants are using this support to pay basic expenses. </p>
<p>One in five 32-year-olds in our study report struggling to pay for three or more basic expenses (we ask about food, rent or mortgage repayments, house bills and healthcare costs). These young adults are three times more likely than those not facing this struggle to report receiving financial support from their family. </p>
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<p>These gifts and loans are also used to support parenting, and to support those working part-time out of choice or necessity.</p>
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<p>Some of our participants working part-time in their late 20s and early 30s are not in such a precarious position. They are receiving parental support while they pursue graduate study in medicine or law, for example. </p>
<p>So while some are using support to meet day-to-day needs, we also see parents helping their children “get ahead”. </p>
<p>Financial support is also used to pursue extended education and manage a period of insecure and poorly paid employment on the way to more secure and well-paid careers in medicine, academia or journalism.</p>
<p>This intergenerational support has social ramifications that go beyond buying property. Our research suggests it also shapes education pathways, employment, parenting, and potentially general wellbeing. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-well-off-you-are-depends-on-who-you-are-comparing-the-lives-of-australias-millennials-gen-xers-and-baby-boomers-172064">How well off you are depends on who you are. Comparing the lives of Australia's Millennials, Gen-Xers and Baby Boomers</a>
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<h2>An outsized role for the bank of mum and dad</h2>
<p>Our results are an example of just how much life has changed in Australia. The growing challenges of cost of living and the effects of a booming housing market over many decades are changing the dynamics of inequality.</p>
<p>Most of the parents’ generation of the young people we have tracked are part of the Baby Boomer cohort. While there is substantial economic inequality within it, overall, this group benefited from the housing and other <a href="https://doi.org/10.1080/1600910X.2022.2058718">asset</a> booms over recent decades. </p>
<p>Many parents are using this foundation to help their children well beyond their teenage years. Of course, wealthy parents might find it easier to provide this support but are not the only parents providing it. For less wealthy parents, this might potentially change their plans for their own future and retirement. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/friday-essay-how-policies-favouring-rich-older-people-make-young-australians-generation-f-d-199403">Friday essay: how policies favouring rich, older people make young Australians Generation F-d</a>
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<p>Previous research has highlighted that the bank of mum and dad is becoming crucial for <a href="https://doi.org/10.1080/02673037.2020.1754347">buying</a> a house and that this might exacerbate and entrench <a href="https://doi.org/10.1080/1600910X.2020.1752275">inequality</a> for future generations.</p>
<p>Our work suggests it goes beyond housing. Parents are helping combat financial insecurity for their young adult children across the board. Our data shows this widespread insecurity emerged before the current cost-of-living crisis, but current conditions are going to exacerbate it. </p>
<p>So we need to ask whether we want the bank of mum and dad to continue to play an ever-growing role in life chances in Australia. Based on our research, that change is already underway.</p><img src="https://counter.theconversation.com/content/219966/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dan Woodman receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Julia Cook receives funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Quentin Maire does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointments.</span></em></p>It’s now common knowledge loans and gifts from family are a large part of breaking into the housing market. But how is parental financial support being used in other areas?Dan Woodman, TR Ashworth Professor in Sociology, The University of MelbourneJulia Cook, Senior Lecturer in Sociology, University of NewcastleQuentin Maire, Senior Research Fellow, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2178542023-11-16T14:27:54Z2023-11-16T14:27:54ZSix ways the upcoming autumn statement could affect your personal finances<p>The UK chancellor Jeremy Hunt will have limited room for manoeuvre when he makes his <a href="https://commonslibrary.parliament.uk/what-is-the-autumn-statement/">autumn statement</a> about the government’s financial plans on November 22. The government is committed to supporting the Bank of England’s current strategy for reducing inflation, which involves using rate hikes to slow down economic activity. </p>
<p>This means Hunt can’t take any steps that would immediately boost spending by people, businesses or the government, such as across-the-board income tax cuts. But he is likely to focus on extending tax breaks for business investment aimed at stimulating economic growth over time. </p>
<p>And while the government often saves grand financial plans for its annual budget announcement (<a href="https://commonslibrary.parliament.uk/what-is-the-budget/#:%7E:text=The%20Budget%20is%20a%20statement,same%20day%20as%20the%20Budget.">usually made in March</a>) , some smaller measures have been trailed in recent weeks that could feature in the autumn statement and that would have an impact on your money.</p>
<h2>1) ISA overhaul</h2>
<p>Part of the support for business theme could actually involve an overhaul of individual savings accounts (ISAs). These tax-sheltered savings schemes were introduced in 1999 and allow you to opt for the security of cash savings or putting your money riskier investments such as stocks and shares.</p>
<p><a href="https://www.gov.uk/government/statistics/annual-savings-statistics-2023">Six out of ten ISA accounts</a> are currently in cash, but <a href="https://www.reuters.com/world/uk/uks-jeremy-hunt-plans-isa-overhaul-boost-share-ownership-ft-2023-09-22/">it’s rumoured</a> the chancellor wants to shift ISAs towards being a source of finance for British industry. This could involve raising the annual ISA limit (currently £20,000) for accounts investing in UK companies to encourage more share ownership.</p>
<h2>2) More mortgage support</h2>
<p>According to mortgage lender Halifax, the <a href="https://www.lloydsbankinggroup.com/assets/pdfs/media/press-releases/2023-press-releases/halifax/2023.09.27-halifax-number-of-first-time-buyers-falls.pdf">price of an average first home</a> fell slightly over the 12 months to August 2023, but can still be as much as ten times average earnings in some areas.</p>
<p>Against this backdrop, the government may extend its mortgage guarantee scheme <a href="https://www.gov.uk/government/news/government-extends-mortgage-guarantee-scheme">for another year</a> beyond the end of December 2023, at least for first-time buyers. Under the scheme, the government backs lenders who offer 95% mortgages, which enable homebuyers to put down a deposit of just 5% of the home’s value.</p>
<p>The scheme has <a href="https://uk.finance.yahoo.com/news/uk-house-prices-mortgage-deposit-scheme-stamp-duty-cuts-property-london-113118022.html">attracted criticism</a> though. While these kinds of initiatives can make home ownership more affordable for some, they also increase demand. Without an accompanying move to stimulate extra housing supply, this can keep house prices high.</p>
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<img alt="" src="https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/559894/original/file-20231116-27-9zxym2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Current and hopeful homeowners will be looking out for more support from the chancellor in his autumn statement.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-england-uk-july-19-2013-595875326">Alex Segre/Shutterstock</a></span>
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<h2>3) Stamp duty rebate</h2>
<p>Stamp duty land tax is paid by buyers of homes in England and Northern Ireland that cost more than £250,000 (£425,000 for first-time buyers). There are equivalent taxes in Wales and Scotland.</p>
<p>A cut in stamp duty land tax rates seems unlikely and the current threshold has already been increased <a href="https://www.gov.uk/government/publications/stamp-duty-land-tax-temporary-reductions-for-residential-properties/stamp-duty-land-tax-temporary-increase-to-thresholds">until March 2025</a> anyway. However, the government is <a href="https://www.telegraph.co.uk/news/2023/10/27/homeowners-who-upgrade-energy-efficiency-stampy-duty-rebate/">rumoured</a> to be considering a partial stamp duty rebate for buyers who improve the energy efficiency of their home within two years of purchase.</p>
<p>This seems like a drop in the ocean against the need for wholesale greening of the UK housing stock. which accounts for around <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1147372/2022_Provisional_emissions_statistics_report.pdf">a sixth of the UK’s carbon dioxide emissions</a>. But it could be a relatively inexpensive concession to please homebuyers. </p>
<h2>4) Inheritance tax cut</h2>
<p>Another <a href="https://www.theguardian.com/money/2023/sep/24/sunak-considering-inheritance-tax-cut">persistent rumour</a> is that inheritance tax – which is applied to money and assets you give away – could be cut or even abolished by the current government.</p>
<p>Most lifetime gifts escape the tax, so it is mainly a tax on your estate when you die. However, up to £500,000 of what you leave (up to £1 million for couples who are married or in a civil partnership) can be passed on tax-free. Above that, the tax rate is usually a substantial 40%.</p>
<p>The exemptions mean <a href="https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary/inheritance-tax-statistics-commentary">less than 4% of deaths</a> result in a charge, but inheritance tax is still <a href="https://oro.open.ac.uk/42441/">deeply unpopular</a>. So, cutting or abolishing it could be a vote winner even though most people don’t pay it.</p>
<h2>5) State pension changes</h2>
<p>The government is currently committed to honouring the “triple lock”, in other words increasing state pensions in April each year by the greater of <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2023">price inflation</a> (based on the previous September’s figures), <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/september2023">earnings inflation</a> (over the quarter to the previous July) or 2.5%.</p>
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Read more:
<a href="https://theconversation.com/how-to-fix-the-pensions-triple-lock-but-still-protect-pensioners-from-high-inflation-186611">How to fix the pensions triple lock but still protect pensioners from high inflation</a>
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<p>Since the relevant data has already been published, we already know that under the triple lock the state pension is due to rise in line with average earnings (including bonuses) in April 2024 – an 8.5% increase.</p>
<p>However, legislation does not specify the measure of average earnings that the government must use. This creates wiggle room and <a href="https://www.moneysavingexpert.com/news/2023/10/state-pension-benefits-inflation-/">there has been speculation</a> that state pensions may be increased based on the rise in regular earnings excluding bonuses (7.8%) rather than in line with total pay.</p>
<p>Using the lower figure would save the government <a href="https://commonslibrary.parliament.uk/the-triple-lock-how-will-state-pensions-be-uprated-in-future/">around £900 million</a>. And if you’re getting the full new state pension, you’d see your pension rise to £219.75 a week instead of £221.20 under the higher figure.</p>
<h2>6) Benefits freeze</h2>
<p>In stark contrast to state pensions, the government might freeze benefit payments for working-age people. Ministers are <a href="https://www.bbc.co.uk/news/uk-67385385">rumoured to be considering</a> cuts that would slice billions off the UK’s welfare budget. This could be seen as a callous move since 3.8 million people in the UK are already financially destitute, <a href="https://www.jrf.org.uk/report/destitution-uk-2023">according to think-tank Joseph Rowntree Foundation</a>, despite nearly three-quarters of them being in receipt of state benefits.</p>
<p>Of course, the official details of the statement will remain under wraps until the chancellor makes his speech in parliament. While there has been plenty of speculation in recent months and weeks, you’ll have to wait until then to get a definitive picture of how your finances will be affected.</p><img src="https://counter.theconversation.com/content/217854/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonquil Lowe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>ISAs, benefits and mortgage support are all rumoured to be mentioned in chancellor Jeremy Hunt’s next autumn statement.Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2103442023-08-03T12:56:46Z2023-08-03T12:56:46ZHow the Bank of England’s interest rate hikes are filtering through to your finances<figure><img src="https://images.theconversation.com/files/540992/original/file-20230803-15-rds3cq.jpg?ixlib=rb-1.1.0&rect=20%2C28%2C2685%2C2231&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Bank of England, London.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-uk-june-11-2015-people-451939666">Claudio Divizia/Shutterstock</a></span></figcaption></figure><p>The Bank of England has <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">increased interest rates to 5.25%</a>, a level not seen since April 2008 and markedly higher than the all-time lows of 0.1% seen less than two years ago.</p>
<p>In fact, interest rates hovered between 0.1% and 0.75% for the 13 years to May 2022. We are now in a new era in which the Bank of England – similar to other central banks – is using rate hikes (this is the 14th consecutive increase) to try to bring price inflation down from currently just under 8% towards its <a href="https://www.bankofengland.co.uk/monetary-policy/inflation">target of 2%</a>.</p>
<p>The bank’s goal is to increase the cost of borrowing for retail banks, which then pass these costs on to households and companies. This reduces people’s spending and causes prices to rise more slowly as companies adjust to falling demand.</p>
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Read more:
<a href="https://theconversation.com/interest-rate-hikes-are-not-the-only-tool-to-fight-uk-inflation-heres-what-the-government-should-do-208697">Interest rate hikes are not the only tool to fight UK inflation – here's what the government should do</a>
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<p>But interest rates are often called <a href="https://theconversation.com/why-uk-inflation-is-so-high-compared-to-eu-and-us-and-what-to-do-about-it-206583">a blunt instrument</a> because adjusting them to tackle inflation has <a href="https://www.aeaweb.org/articles?id=10.1257/jep.37.1.121">an uneven effect</a>. This is because people are at different stages of their lives and have varied levels and sources of income, not to mention debt. </p>
<p>So, there are winners and losers. Here are the main factors that influence how rate changes could feed through to your finances.</p>
<h2>Do you have a mortgage?</h2>
<p>Perhaps the most obvious impact of rising interest rates is increased mortgage repayments. This tends to affect younger generations (but not the youngest) and those in the middle of the wealth distribution the most. Higher interest rates <a href="https://academic.oup.com/restud/article-abstract/87/1/102/5272505?redirectedFrom=fulltext">lead to a fall in spending</a> among these groups that is greater than the increase in their mortgage costs, which is what the bank wants to encourage.</p>
<p>However, the worst is yet to come for UK mortgage borrowers. Back in 2008, the bank started cutting interest rates to support the economy after the global financial crisis. At this time, the fee for ending a mortgage deal early to switch to a lower interest rate was often <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4399613">outweighed by the savings gained</a> from the lower rate.</p>
<p>As more borrowers have been on fixed-rate mortgages as a result, people’s actual rates have risen much more slowly than the advertised rates for new mortgage deals. This chart, which includes all current UK mortgage deals, shows that rate rises have so far largely only affected variable- or floating-rate deals:</p>
<figure class="align-center ">
<img alt="Line graph showing various mortgage product repayment rates, all fairly level, slight increase, but variable rates have increased significantly." src="https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=526&fit=crop&dpr=1 600w, https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=526&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=526&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=661&fit=crop&dpr=1 754w, https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=661&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/540985/original/file-20230803-15-flfgk9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=661&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/statistics/visual-summaries/effective-interest-rates">Bank of England</a></span>
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</figure>
<p>In contrast, this chart, which includes only new mortgage deals agreed since August 2021, shows how interest rate rises are similarly affecting repayments on all types of new deal:</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing sharp rise in mortgage repayment rates" src="https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=526&fit=crop&dpr=1 600w, https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=526&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=526&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=661&fit=crop&dpr=1 754w, https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=661&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/540986/original/file-20230803-19-6dd92w.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=661&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/statistics/visual-summaries/effective-interest-rates">Bank of England</a></span>
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<p>As rates rise, only those who have to refinance will choose to move to a new loan, so the effects are likely to filter through at a slower pace. But it will happen – the 4 million borrowers expected to move to new mortgage contracts over the next three years could pay <a href="https://www.theguardian.com/money/2023/jul/12/mortgage-payment-rise-bank-of-england-2026-forecast">up to £220 more a month</a> because of the current higher-rate environment.</p>
<h2>Do you own your home outright?</h2>
<p>House prices are widely expected to fall in coming months as <a href="https://www.aljazeera.com/economy/2023/8/1/uk-house-prices-drop-by-most-since-2009-amid-rising-interest-rates">rate hikes make it more difficult</a> to get a mortgage – but this will only affect people who want to buy or sell. While your house may be worth less, if you remain living in it you still get to enjoy your home regardless of its price. </p>
<p>However, a house can also be a valuable source of collateral or security for repayment of a loan, so lower house prices can mean less opportunity to borrow in difficult times. This is particularly important for <a href="https://www.jstor.org/stable/26543941">older generations</a> who may need to pay for long-term care.</p>
<h2>Do you have a pension or savings?</h2>
<p>On the other hand, older generations (and wealthier households) may benefit from higher rates because they’ve had more time to accumulate wealth. </p>
<p>Rate hikes can boost returns on savings and fixed-income assets such as bonds and <a href="https://benjaminmoll.com/wp-content/uploads/2021/11/APR_slides.pdf">annuities</a> (which provide <a href="https://www.ageuk.org.uk/information-advice/money-legal/pensions/annuities/">a fixed income stream</a> in retirement). For example, a typical 65-year-old looking to purchase an annuity with a £100,000 pension could get <a href="https://www.sharingpensions.co.uk/annuity-rates-chart-latest.htm#:%7E:text=Latest%20annuity%20rates,-How%20annuity%20rates&text=The%2015%2Dyear%20gilt%20yields%20increased%20by%20%2B10%20basis%20points,yields%20remain%20at%20current%20levels">up to £7,352 per year</a> now, compared with £4,786 at the start of 2021.</p>
<p>On the other hand, higher interest rates can make investing in the stock market less attractive. Reduced spending by the public means companies make less money for shareholders.</p>
<h2>Do you rent your home?</h2>
<p>The cost of living crisis, competition for rental properties and lack of supply of housing has led to a significant increase in costs for renters. But are they winners or losers when it comes to increases in interest rates? The picture is mixed. </p>
<p>Landlords may initially pass higher mortgage costs to renters. But, as more landlords exit the market, lower house prices could eventually cause rents to fall, as landlords need less to cover mortgage repayments. In the medium term, evidence suggests that higher interest rates ultimately <a href="https://www.frbsf.org/economic-research/publications/economic-letter/2023/february/can-monetary-policy-tame-rent-inflation/#:%7E:text=Evidence%20suggests%20that%2C%20as%20monetary,tends%20to%20adjust%20relatively%20slowly">reduce rents</a>. </p>
<p>However, renters tend to be younger, less well off, and often living paycheck to paycheck, which is more likely to leave them worse off overall.</p>
<figure class="align-center ">
<img alt="Two red and white signs saying " src="https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/540988/original/file-20230803-27-fpyrml.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/red-rent-sign-details-on-front-685694197">Andriy Blokhin/Shutterstock</a></span>
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<h2>Do you live paycheck to paycheck?</h2>
<p>A rise in interest rates tends to mean that things become more expensive, so <a href="https://www.cato.org/research-briefs-economic-policy/expansionary-monetary-policy-increases-inequality?utm_campaign=Research%20Briefs%20in%20Economic%20Policy&utm_medium=email&_hsmi=200695551&_hsenc=p2ANqtz-_RH3P0DhUGejoN8yynX39-0Cag6DT3zwhSsvUl9f03yFSUoZmjbzlxxlNL6S_qJPx0ceYowguVC0GUmGSSE8j31q_gnw&utm_content=200695551&utm_source=hs_email">people spend less</a> and companies are unable (or don’t want to) pay workers enough to match the rise in prices. So, if even your take-home pay stays the same (or even goes a bit higher), the amount of good services you can buy with your wages falls. </p>
<p>This probably adversely affects those on lower incomes the most. The last time there was a major increase in interest rates in the 1970s, earnings losses from low-income households were <a href="https://www.jstor.org/stable/10.1086/675535">many times</a> that of high-income households. And when we consider the effects of lower incomes on spending, the gap between richer and poorer households is even greater. This is because people with no savings cushion are forced to reduce their consumption when prices rise. Around a third of UK workers are currently <a href="https://www.wtwco.com/en-gb/news/2022/06/a-third-of-uk-workers-are-living-payday-to-payday">in this category</a>.</p>
<p>On the other hand, the wealthy can draw down savings – including <a href="https://www.theguardian.com/business/2023/jun/29/uk-households-withdrawing-savings-at-fastest-ever-rate-official-figures-show">savings built up during the pandemic</a> – and continue to spend.</p>
<p>Understanding and measuring the varied impact of rate changes in the current era of increases is crucial. This should be a top priority for economists and policymakers who want to achieve stable price inflation and grow the economy, while also protecting the most vulnerable.</p><img src="https://counter.theconversation.com/content/210344/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>William Tayler does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Interest rate rises have an uneven effect depending on your savings, living conditions and stage of life.William Tayler, Assistant Professor in Economics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2080452023-07-03T16:02:50Z2023-07-03T16:02:50ZHow the UK’s mortgage rescue deal could help or hurt you – in part depending on where you live<figure><img src="https://images.theconversation.com/files/535288/original/file-20230703-272664-aa70gw.jpg?ixlib=rb-1.1.0&rect=39%2C55%2C5268%2C3469&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many mortgage borrowers are expecting their repayments to rise rapidly.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tired-stressed-young-woman-entrepreneur-office-2234106907">KucherAV/Shutterstock</a></span></figcaption></figure><p>Millions of UK mortgage borrowers could experience <a href="https://www.telegraph.co.uk/personal-banking/mortgages/mortgage-rates-rise-after-inflation-shock-nationwide/">significant payment shocks</a> this year. This is happening due to a steep rise in the Bank of England’s base rate over the past year to the highest level since 2008. This rate feeds through to many of the mortgage deals taken out by homeowners around the UK. </p>
<p>To attempt to alleviate some of the pain for homeowners that will see large spikes in their payments this year and next, major UK lenders agreed <a href="https://www.reuters.com/business/finance/uks-hunt-agreed-measures-with-banks-ease-mortgage-payments-strain-2023-06-23/">to provide limited help</a> to those struggling with the mortgage repayments. </p>
<p><a href="https://www.gov.uk/government/news/chancellor-agrees-new-support-measures-for-mortgage-holders">Among other measures</a>, lenders that participate will agree to allow borrowers to switch to interest-only payment terms or to extend the duration of their mortgage. Borrowers will be able to return to their original deal within six months without any impact on their credit rating. Lenders have also been asked to sign up to a 12-month repossession break to provide a grace period to people at risk losing their homes due to arrears.</p>
<p>But while these measures will help some borrowers, they could cause unintended consequences and create further mortgage payment issues. First of all, the Bank of England’s base rate is already <a href="https://www.theguardian.com/business/2023/jun/22/markets-predict-uk-interest-rate-bank-of-england#:%7E:text=The%20financial%20markets%20are%20predicting,by%20half%20a%20percentage%20point.">expected to rise to 6%</a> by the end of 2023 and could go higher next year. </p>
<p>Interest-only borrowers’ repayments only include the interest charged on the loan and nothing towards the principal amount. So, after six months (and at the same level of income), they could face much higher payment shocks. If rates are still relatively high after 12 months, many households could still be at risk of losing their homes. </p>
<p>There is also the question of which lenders will participate in mortgage rescue plan – it is a voluntary scheme. According to the FCA, <a href="https://www.gov.uk/government/news/chancellor-agrees-new-support-measures-for-mortgage-holders">around 75% of lenders</a> will join. Those borrowers with nonparticipating lenders would not be able to use the grace period or other measures. </p>
<h2>How mortgages differ by region</h2>
<p>Another overlooked issue in the rescue plan is that, <a href="https://www.tandfonline.com/doi/full/10.1080/00343404.2012.750426?casa_token=QTqWW5oKqEQAAAAA%3Al3ct0-6LoeiDXEXei78C1AdARczKDEa1AOKil7xYvsrQoHXPdsSPxuBqV20Zs_9Jenk2lwOPqYIYsw">according to my research</a>, households across the various regions of the UK will be affected differently by the mortgage crisis. Payment shocks will be amplified for those in the areas with higher house prices and higher average loan amounts. </p>
<p>The table below shows the difference in the increase in repayments for an average loan amount across the UK, based on different types of mortgage product. These figures show what repayments would have been in June 2022 versus June 2023, when the Bank of England had increased rates from 1.25% (for June 2022) to 5.00% (for June 2023) – repayments will be even higher if it goes to 6%, as expected by financial markets.</p>
<p><strong>Repayment increases by region, June 2022 vs. June 2023:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=261&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=261&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=261&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=328&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=328&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535330/original/file-20230703-269585-sackvp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=328&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Borrowers’ exposure to an increase in average monthly mortgage payments for an average loan amount, by region and mortgage type (SVR, 3-year fixed rate).</span>
<span class="attribution"><a class="source" href="https://www.gov.uk/government/statistics/quality-assurance-of-administrative-data-in-the-uk-house-price-index/regulated-mortgage-survey-data-provided-by-the-council-of-mortgage-lenders">ONS Regulated Mortgage Survey, BSA Statistics (2023)</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The monthly mortgage repayments of households in London on <a href="https://www.nerdwallet.com/uk/mortgages/what-is-standard-variable-rate/">standard variable rates</a> (SVRs – the rate borrowers tend to automatically switch to after a fixed or tracker deal period ends) increased by £1,398 and by £1,142 for those on three-year fixed rate mortgages, for example. In the East Midlands, in comparison, average SVR repayments have increased by £587 and by £429 for three-year fixed rates since last year.</p>
<p>Taking current base rate changes into account, borrowers making interest-only mortgage payments will be even more exposed to future payment shocks when only repaying the interest on their principal loan amount. These borrowers will not have been chipping away at the equity part of their loans, like those on repayment mortgages, keeping their loan larger than it would have been if they hadn’t taken advantage of the rescue measure.</p>
<p>For the average principal loan amount of £250,000, for example, monthly interest-only repayments on the average UK SVR would be £587, compared to a total interest payment of £323 for a repayment mortgage (plus an additional amount towards paying off the borrowed amount, called the equity). </p>
<p>This is because when repayment borrowers pay interest plus equity, the total interest charged on a mortgage falls as the remaining debt decreases. So while repayment borrowers pay less interest as their equity builds and the principal debt falls, they still have to make higher payments overall.</p>
<p>So, for a three-year fixed rate deal, average total interest payments would be £497 per month for the six months for interest-only borrowers, compared to a similar repayment deal for which total interest payments would be £226. This means the exposure to overpayment when choosing to pay interest-only for the six-month rescue period would be:</p>
<ul>
<li><p>Three-year fixed rate 6x(£587-£323) = £1,584</p></li>
<li><p>SVR: 6x(£497-£226) = £1,626</p></li>
</ul>
<p>That is, choosing to pay interest only for six months could add at least £1,500 to a borrower’s bill over the life of the average home loan versus what they would pay if they remained on a repayment mortgage.</p>
<p>Regional differences will also come into play here when considering exposure to payment shocks and excessive mortgage payments. This is because households in regions with higher house prices borrow larger loans and so repay more over the life of the loan. </p>
<p>So, both base rate changes, but also the negative impacts of the mortgage rescue initiative will disproportionally affect households in areas with higher houses prices, such as London or East Anglia.</p>
<figure class="align-center ">
<img alt="Hand slotting piece with text mortgage into wooden model of a house." src="https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=234&fit=crop&dpr=1 600w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=234&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=234&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=294&fit=crop&dpr=1 754w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=294&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/535291/original/file-20230703-215550-wvds62.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=294&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Solving the mortgage repayment shock problem will not be this easy.</span>
<span class="attribution"><span class="source">Jirsak/Shutterstock</span></span>
</figcaption>
</figure>
<h2>Searching for a solution</h2>
<p>There is no straightforward solution to this situation, particularly since mortgage rates operate at the national level. A light-touch intervention, such as temporary caps on lenders’ profit margins could help. For example, if lenders were not allowed to make more than 2 percentage points above the bank base rate for certain mortgage products. </p>
<p>But the government also needs to consider the significant differences in payment shock levels across the country, particularly as it is likely to face a general election by January 2025, <a href="https://uk.news.yahoo.com/next-uk-general-election-why-172826087.html">if not before</a>. This is important when evaluating the robustness of the economy to recession, which already has <a href="https://theconversation.com/three-charts-that-explain-why-falling-living-standards-could-deepen-the-uks-north-south-divide-196088">an uneven effect</a> on different locations and households.</p><img src="https://counter.theconversation.com/content/208045/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alla Koblyakova works as the Property Investment and Finance Course Leader at the Nottingham Trent University</span></em></p>Recent measures introduced to help struggling UK homeowners aren’t as helpful as they seem at first.Alla Koblyakova, Senior Lecturer in Property Finance, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2079382023-06-23T13:39:43Z2023-06-23T13:39:43ZHouse prices are falling, but that doesn’t mean you should buy now – here’s what first-time buyers should consider<figure><img src="https://images.theconversation.com/files/533158/original/file-20230621-17-zukczo.jpg?ixlib=rb-1.1.0&rect=616%2C174%2C5518%2C3228&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/two-young-lesbian-women-family-couple-2297606011">Andrii Iemelianenko/Shutterstock</a></span></figcaption></figure><p>House prices in the UK fell by 3.4% in the last year, the biggest annual fall in <a href="https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-slips-back-in-may">nearly 14 years</a>. The inflation-adjusted average house price is now what it was in 2014.</p>
<p>While this may seem like good news, it doesn’t necessarily mean it’s the right time to get on the property ladder. Today, many in their 20s and 30s face difficulties buying their first house mainly due to increasing borrowing costs. </p>
<p>Average mortgage lending rates (based on a two-year fixed rate with a 10% deposit) are now close to 6% compared to <a href="https://www.bankofengland.co.uk/statistics/visual-summaries/quoted-household-interest-rates">2% in January 2022</a>. For a £200,000 mortgage, <a href="https://www.statista.com/statistics/915977/average-value-of-mortgage-granted-in-the-united-kingdom/">the average for UK households</a>, this 4% difference increases monthly payments by almost <a href="https://theconversation.com/five-ways-to-reduce-your-mortgage-repayments-in-2023-and-why-rates-have-risen-so-high-196327">£480 a month</a>.</p>
<hr>
<figure class="align-right ">
<img alt="Quarter life, a series by The Conversation" src="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451343/original/file-20220310-13-1bj6csd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><strong><a href="https://theconversation.com/uk/topics/quarter-life-117947?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">This article is part of Quarter Life</a></strong>, a series about issues affecting those of us in our twenties and thirties. From the challenges of beginning a career and taking care of our mental health to the excitement of starting a family, adopting a pet or just making friends as an adult. The articles in this series explore the questions and bring answers as we navigate this turbulent period of life.</em></p>
<p><em>You may be interested in:</em></p>
<p><em><a href="https://theconversation.com/why-youre-less-likely-to-get-rich-these-days-if-your-parents-arent-already-wealthy-194321?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Why you’re less likely to get rich these days if your parents aren’t already wealthy</a></em></p>
<p><em><a href="https://theconversation.com/managing-people-for-the-first-time-expert-tips-on-how-to-succeed-198615?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Managing people for the first time: expert tips on how to succeed</a></em></p>
<p><em><a href="https://theconversation.com/owning-houseplants-can-boost-your-mental-health-heres-how-to-pick-the-right-one-202197?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+YP2022&utm_content=InArticleTop">Owning houseplants can boost your mental health – here’s how to pick the right one</a></em></p>
<hr>
<p><a href="https://www.bbc.co.uk/news/business-12196322">Soaring inflation</a> is not helping either. It is becoming more difficult to afford basic living expenses (including <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/march2023">rental costs</a>), and also to save for a deposit required for a mortgage.</p>
<p>The benefit of decreasing house prices may be offset by interest rate hikes and inflation. What’s more, the prices for typical first-time-buyer properties, such as flats, have not eased as much as the other sectors of the market. Since the start of the pandemic, the price increase, and the recently observed drops, have been less for flats and maisonettes than for other properties.</p>
<figure class="align-center ">
<img alt="Chart showing that prices for flats and maisonettes have not increased or dropped at the same levels as other properties." src="https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=316&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=316&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=316&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=397&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=397&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533128/original/file-20230621-18-2m3krj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=397&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Alper Kara/Land Registry Data</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>What to ask a mortgage adviser</h2>
<p>The idea of buying a first home is exciting. However, it is best to act with caution and consider the various factors carefully. One important factor is, of course, what mortgages are available. </p>
<p>Mortgage comparison <a href="https://www.moneysavingexpert.com/mortgages/best-buys/">websites</a> are a good starting point. Once you familiarise yourself with those, the best approach is to use a qualified, independent mortgage adviser. They often have access to mortgages exclusive to them, often with better rates, than those available publicly or from a bank.</p>
<p>After checking that they are a regulated and independent adviser, and asking about their fees, here are three important questions to ask and discuss with the broker. Don’t be shy, and make sure you are comfortable with all the details before deciding.</p>
<h2>1. How much can I borrow?</h2>
<p>Find out how much you can borrow <a href="https://www.moneysavingexpert.com/mortgages/how-much-mortgage-borrowing/">using a mortgage calculator</a>. Often, couples who are both in work are at an advantage and can borrow more. </p>
<p>Be on the conservative side when considering how much you can pay for a mortgage after living expenses. Don’t stretch your income to the limit, as interest rates could increase in the future. It is best to talk to a mortgage adviser if you are worried about this.</p>
<p>If you are renting, compare your current rent payment to what you would potentially be paying for a mortgage. If they are similar, then it may be worth buying as a mortgage helps you to own your home over time.</p>
<h2>2. What are my deposit options?</h2>
<p>Check the size of the deposit needed for the property you want to buy. With the government’s <a href="https://www.gov.uk/government/news/government-extends-mortgage-guarantee-scheme">mortgage guarantee scheme</a>, this could be as low as 5%. To support first-time buyers, there are also <a href="https://www.skipton.co.uk/press-office/press-release-article?BlogID=%7B13A47958-66DB-4D1A-B686-F7BFCF3FD742%7D">0% deposit mortgages</a>. However, be aware that a no-deposit mortgage comes with risks. If house prices fall further, you may be left in negative equity instantly – meaning that your house is now worth less than your outstanding mortgage. </p>
<p>Other mortgage products may be available if you have support from <a href="https://www.nationwide.co.uk/mortgages/family-deposit-mortgage/">family</a> or <a href="https://www.generationhome.com/">friends</a> for a deposit. Bear in mind that deposit size matters as banks charge lower rates if you have a higher deposit – this is known as the <a href="https://www.halifax.co.uk/mortgages/help-and-advice/what-is-loan-to-value.html">loan-to-value ratio</a>.</p>
<h2>3. What other costs might I face?</h2>
<p>Buying and selling properties involves high extra costs, <a href="https://www.thetimes.co.uk/money-mentor/answer/hidden-costs-house-buying/">such as legal, survey, mortgage or estate agent fees</a>. The good news is that first-time buyers are <a href="https://www.gov.uk/government/publications/stamp-duty-land-tax-relief-for-first-time-buyers/stamp-duty-land-tax-relief-for-first-time-buyers">exempt from stamp duty</a>, a substantial cost, for properties up to £300,000. </p>
<p>Make sure you have savings beyond your deposit. If you anticipate needing to move again soon, for example, to move in with a partner or be closer to family, then it may not be the best option to buy a home before you settle.</p>
<p>Also, be aware that <a href="https://www.gov.uk/leasehold-property/service-charges-and-other-expenses">leasehold properties</a> (typically flats or apartments) often have monthly service charges, usually <a href="https://www.redbrickpm.co.uk/blog/how-are-the-average-service-charges-for-flats-calculated/#:%7E:text=What%20is%20the%20average%20service,London%20and%20new%2Dbuild%20flats.">between £1,000 to £2,000 a year</a>. </p>
<figure class="align-center ">
<img alt="A young man and woman sitting on a couch, looking stressed. He is looking at a document, she has her head in her hands." src="https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/533156/original/file-20230621-27-7iw1na.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">There are more financial factors to consider than house price.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/frustrated-young-couple-checking-financial-documents-1902150268">fizkes/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Understanding mortgage products</h2>
<p>Understanding mortgage products and comparing them is a daunting task. It is best to discuss these in detail with a mortgage adviser to make the right choice. A key feature of mortgages is interest charged. You’ll need to have a plan for how to pay this, especially as interest rates go up. </p>
<p>A fixed-rate mortgage gives you certainty for a period of time (typically two to five years). With a fixed rate your monthly payments will not change, regardless of the <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">Bank of England base rate changes</a>. There are now also <a href="https://www.moneysupermarket.com/mortgages/ten-year-fixed-rate/">ten-year fixed rates</a> offered in the market, but such deals would not allow you to benefit from any long-term drop in the interest rates.</p>
<p>A variable-rate mortgage is adjusted automatically to Bank of England rate changes. So your monthly payments may increase or decrease unexpectedly. The <a href="https://www.bbc.co.uk/news/business-65966723">higher than expected inflation figures</a> could be a signal that interest rates may increase further in the coming months. </p>
<p>Check if a deal allows you to <a href="https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/#:%7E:text=Note.,more%20than%20once%20a%20year.">overpay</a> your mortgage, typically around 10% of the borrowed amount. In a high-interest-rate environment like now, having the option to make additional payments whenever you can, will reduce your overall borrowing costs.</p>
<p>Buying your first home is likely the most important financial decision of your life so far. Don’t rush into things. Speak to experts, and consider inflation and other costs. </p>
<hr>
<p><em>This article is not intended to be in-depth financial advice. If you have questions about your situation, talk to a qualified, independent mortgage adviser.</em></p><img src="https://counter.theconversation.com/content/207938/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The questions you should be asking a mortgage broker.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2053362023-05-17T10:46:24Z2023-05-17T10:46:24ZMortgage lenders are relaxing their rules – here’s why that could be risky for borrowers<figure><img src="https://images.theconversation.com/files/526553/original/file-20230516-17-melcmo.jpg?ixlib=rb-1.1.0&rect=137%2C47%2C3856%2C2443&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Budgeting to buy a home.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/buying-selling-houses-real-estate-prices-1032268546">Tero Vesalainen/Shutterstock</a></span></figcaption></figure><p>The Bank of England increased its base rate yet again in May 2023 to 4.5%, pushing borrowing costs to the <a href="https://theconversation.com/bank-of-england-interest-rate-rise-why-this-could-be-the-last-increase-for-a-while-205337">highest level in almost 15 years</a>. More than <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">6 million UK households</a> will now see their mortgage payments increase by the end of 2025, with more than <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">4 million</a> experiencing this in 2023.</p>
<p>For an average household this would mean an increase from <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">£750 to £1,000 in monthly payments</a> – or around 17% of average pre-tax income compared to 12% in June 2022. As the pressure of increasing interest costs, as well as rising house prices, weighs on households, mortgage lenders are developing and offering borrowers different kinds of products in response. </p>
<p>UK lender Skipton Building Society <a href="https://www.skipton.co.uk/press-office/press-release-article?BlogID=%7B13A47958-66DB-4D1A-B686-F7BFCF3FD742%7D">recently launched a 100% or no-deposit mortgage</a> as “a lifeline to tenants across the country, to help them break out of their trapped rental cycles and onto the property ladder for the first time”. Alternatively, <a href="https://www.ftadviser.com/mortgages/2019/06/26/most-mortgages-now-have-40-year-terms/?utm_campaign=FTAdviser+news&utm_source=emailCampaign&utm_medium=email&utm_content=">home loans that last as long as 40 years</a> – so-called <a href="https://www.thisismoney.co.uk/money/mortgageshome/article-12079901/63-000-thats-extra-cost-150-000-marathon-mortgage.html">marathon mortgages</a> – are on the rise. They can make it easier for some people to get on the property ladder by stretching out payments over a longer period.</p>
<p>But mortgage lending criteria were <a href="https://www.tandfonline.com/doi/full/10.1080/14616718.2011.548585?scroll=top&needAccess=true&role=tab&aria-labelledby=full-article">tightened for good reason after the 2008 global financial crisis</a>. And while these recent relaxations may be designed to help struggling would-be borrowers trapped in rising interest rate, rent and house price hell, hopeful homeowners should be very cautious about the risks involved.</p>
<h2>Long-term loans</h2>
<p>Prior to 2007, mortgage terms were rarely longer than 25 years. Only about 21% of first-time borrowers and 8% of remortgages opted for such a long term in December 2007. While <a href="https://www.zoopla.co.uk/discover/property-news/uk-lender-offers-40-year-fixed-rate-mortgage/">one lender</a> started offering a 40-year fixed rate product at the end of 2021, marathon mortgages are long-term loans but don’t typically offer a fixed rate for the length of the loan. By 2022 more than 55% of first-time borrowers and 34% of remortgagers had <a href="https://www.ukfinance.org.uk/system/files/2023-03/Household%20Finance%20Review%202022%20Q4.pdf">home loans with terms of more than 30 years</a>.</p>
<p><strong>Mortgage terms are getting longer</strong></p>
<p>This recent resurgence is most likely due to the affordability benefits of marathon mortgages. <a href="https://theconversation.com/five-ways-to-reduce-your-mortgage-repayments-in-2023-and-why-rates-have-risen-so-high-196327">Extending the term of a loan allows borrowers</a> to stretch out the repayment costs of a mortgage over time. It also allows people to purchase a more expensive home – an important benefit in today’s market where average house prices have rocketed from £190,000 in 2009 to just shy of £300,000 in 2023.</p>
<p><strong>House prices have been rising</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing rising UK average house prices since 2005." src="https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=339&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=339&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=339&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=427&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=427&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526300/original/file-20230515-25-mdvsxb.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=427&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/previousReleases">Office for National Statistics UK House Price Index</a></span>
</figcaption>
</figure>
<p>Long-term mortgages also help borrowers qualify for mortgages under the <a href="https://www.fca.org.uk/news/press-releases/new-mortgage-rules-come-force">stricter affordability rules</a> introduced by the UK’s financial regulator in 2014. These rules require lenders to ensure that borrowers have sufficient monthly income to cover living expenses and other debts after their mortgage payments. </p>
<p>Spreading the cost to around 40 years allows marathon mortgage holders to reduce monthly costs, passing affordability assessments. Marathon mortgages do not seem to be a current concern for the regulator.</p>
<p>Of course, a marathon mortgage borrower could shorten their term over the years as they remortgage to avoid the lender’s standard variable rate. Also, if the base rate decreases over time, interest payments will fall and the overall mortgage will become more affordable. And, of course, any future increase in income allows a borrower to overpay during the term of the loan.</p>
<p>On the the other hand, long-term borrowing means significantly higher interest payments. For example, <a href="https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/">a household borrowing £250,000 at a rate of 5% for 25 years</a> would pay a total of £188,600 in interest over the lifetime of the mortgage (assuming, for simplicity, that the interest rate does not change over the life of the mortgage). But borrowing for 40 years would result in total interest payments of £328,930 – a staggering £140,330 difference.</p>
<p>Marathon mortgages may also mean borrowers must make repayments <a href="https://www.ukfinance.org.uk/system/files/2023-03/Household%20Finance%20Review%202022%20Q4.pdf">well into their 70s</a> considering the <a href="https://www.money.co.uk/mortgages/first-time-buyer-mortgages/statistics">average age for first-time buyers outside London is now around 33</a>. For some this may mean continuing to pay a mortgage into retirement. This should be a key consideration when considering long-term borrowing. It would certainly impact financial security after retirement so careful planning and independent financial advice is crucial.</p>
<figure class="align-center ">
<img alt="Hands cupped underneath chart showing rising house values." src="https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526552/original/file-20230516-24-pw785y.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/rising-house-sales-concept-742144642">Sasun Bughdaryan/Shutterstock</a></span>
</figcaption>
</figure>
<h2>No-deposit mortgages</h2>
<p>Rising rents, coupled with <a href="https://www.ft.com/content/0ebcf348-a664-442c-9311-5443e2d80f53">soaring prices of other essential expenses</a> such as food and energy bills, have left many first-time buyers struggling to save for a deposit. No-deposit products help first-time buyers break this cycle by swapping rental costs with mortgage payments, allowing them to eventually own their home. </p>
<p>Skipton Building Society’s recent launch of a <a href="https://www.skipton.co.uk/mortgages/track-record-mortgage">“100% mortgage”, which means borrowers don’t need a deposit</a>, aims to help first-time buyers of homes of up to £600,000 get onto the property ladder. </p>
<p>Such products were commonly available before the 2008 financial crisis. But the sharp fall in house prices since – mainly the 20% drop between 2007 and 2009 – <a href="https://www.ft.com/content/f067f31e-56c8-11de-9a1c-00144feabdc0">is reported to have left around a million households stuck in negative equity</a>. This is when your home is worth less than the mortgage you owe on it, leaving you unable to sell your properties.</p>
<p>The danger now is that the average house price today is much higher than the pre-financial crisis period (£300,000 versus £190,000). So, if such price drop were to happen in the near future, the impact would be even more devastating for no-deposit mortgagers. Although a crash does not seem to be on the cards, <a href="https://www.halifax.co.uk/assets/pdf/april-2023-house-price-index.pdf">downward pressure on house prices is expected</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/uk-house-prices-history-says-the-market-is-in-for-a-long-slowdown-not-a-crash-186072">UK house prices: history says the market is in for a long slowdown not a crash</a>
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</em>
</p>
<hr>
<p>As we experienced in the aftermath of the 2008 financial crisis, relaxed lending criteria combined with borrowing beyond means can have dire consequences. It’s important for borrowers to be aware of these risks and to be very cautious when thinking about borrowing for the long term, particularly without a deposit.</p><img src="https://counter.theconversation.com/content/205336/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New mortgage products designed to help struggling first-time buyers hark back to the pre-2008 market and so should come with a warning.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2053372023-05-11T13:28:34Z2023-05-11T13:28:34ZBank of England interest rate rise: why this could be the last increase for a while<figure><img src="https://images.theconversation.com/files/525457/original/file-20230510-12317-w8ujoi.jpg?ixlib=rb-1.1.0&rect=0%2C92%2C3861%2C2323&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Bank of England, London.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bank-england-london-46410508">cristapper/Shutterstock</a></span></figcaption></figure><p>The <a href="https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2023/may-2023">Bank of England</a> has increased its benchmark interest rate to 4.5% – the <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">seventh</a> rise since May 2022, when the base rate was just 1%. It is now at the highest level since 2008. </p>
<p>The European Central Bank (<a href="https://www.ecb.europa.eu">ECB</a>) also increased its <a href="https://www.ft.com/content/bd3c28cc-3407-45a9-9c72-9c89c9aa9740">benchmark rate to 3.25%</a> at its latest meeting in early May and is now nearing a high not seen <a href="https://money.cnn.com/2001/10/25/international/ecb/">since 2001</a>. A few days before, the <a href="https://www.federalreserve.gov">US Federal Reserve</a> increased its rate from 5% to 5.25%, the highest level since mid-2007 and its <a href="https://www.nytimes.com/2023/05/07/business/federal-reserve-interest-rates.html">10th consecutive increase</a> in just over a year. </p>
<p>Both central banks are nearing the end of their <a href="https://www.frbsf.org/economic-research/publications/economic-letter/2023/february/financial-market-conditions-during-monetary-tightening/#:%7E:text=A%20tightening%20cycle%20ends%20when,months%20after%20and%20is%201.5">rate-tightening cycles</a> as price pressures fall from a peak and the world anticipates a looming credit crisis.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/small-businesses-seek-to-avoid-possible-credit-crunch-as-federal-reserve-raises-rates-once-more-204256">Small businesses seek to avoid possible credit crunch as Federal Reserve raises rates once more</a>
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</em>
</p>
<hr>
<p>But plans could change depending on how the economy fares. And whether we can expect the same from the Bank of England could depend more on the fragility of the banking system than the need to continue to tame inflation.</p>
<p>The UK’s new <a href="https://www.ft.com/content/aa09b5b9-f88a-4ffc-8a1c-826970dfbc73">4.5% base rate may seem high</a>, but it’s actually quite low compared to the <a href="https://www.ft.com/content/a92ead2e-5a5e-4861-b7b0-ad5e787646d1">1980s</a> and <a href="https://www.bloomberg.com/news/articles/2022-02-19/1990s-lesson-recession-is-the-price-of-curbing-u-k-inflation">1990s</a>. During these decades, the rate peaked at 16% and 13.88% respectively, but was always higher than 5%. These high rates reflected a similar <a href="https://www.historyandpolicy.org/policy-papers/papers/reforming-the-bank-of-england-to-tame-inflation-and-boost-financial-stability-lessons-from-two-centuries-of-british-financial-history">battle with high inflation</a> by the bank as it is dealing with today. </p>
<p><strong>Low base rate today versus 1980s and 1990s:</strong></p>
<figure class="align-center ">
<img alt="A line chart showing high base rates in the 1970s, 1980s and 1990s, followed by a drop in the last decade." src="https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=371&fit=crop&dpr=1 600w, https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=371&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=371&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=466&fit=crop&dpr=1 754w, https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=466&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/525588/original/file-20230511-9582-saii54.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=466&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">Bank of England</a></span>
</figcaption>
</figure>
<p>So why are today’s interest rates at such (relatively) low levels? This is because of the toolkit central banks use to tackle rising prices, in particular base rate adjustments.</p>
<p>Like the Fed and the ECB, the Bank of England is trying to hit an inflation <a href="https://www.cnbc.com/video/2023/02/20/why-the-federal-reserve-aims-for-2percent-inflation.html">target of 2%</a>. The latest <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/d7g7/mm23">official UK data</a> shows inflation is at 10.1%, considerably above this target. </p>
<p>Inflation is measured by tracking the yearly change in the prices of <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukconsumerpriceinflationbasketofgoodsandservices/2023">a “basket” of goods and services</a> that includes items like food, petrol and leisure activities. <a href="https://www.theguardian.com/business/2023/feb/21/energy-crisis-ukraine-war-uk-cost-gas">Surging energy prices</a> following <a href="https://www.bbc.co.uk/news/world-60525350">Russia’s invasion of Ukraine</a> last February caused inflation to spike but have now been priced in to the annual measure. </p>
<p>Now food prices are keeping it elevated with a 19% rise over the year to March – the <a href="https://news.sky.com/story/uk-inflation-why-are-food-prices-rising-so-much-12860884">fastest increase in over 45 years</a>.</p>
<p>Interest rate changes are <a href="https://www.chicagobooth.edu/review/what-makes-it-hard-control-inflation">a blunt tool</a> to control such price rises without severely denting economic activity. A good example of this is when the US suffered painful <a href="https://www.nber.org/system/files/chapters/c11462/c11462.pdf">inflation during the 1970s</a>. </p>
<p>It took a crackdown by cigar-chomping Fed chairman <a href="https://en.wikipedia.org/wiki/Paul_Volcker">Paul Volcker</a> to break the cycle of rising prices and wages. He <a href="https://www.bu.edu/econ/files/2011/01/GKcr2005.pdf">slammed the brakes on the economy</a> by raising interest rates to 20%. Volcker’s actions worked: inflation retreated from 14.8% in 1980 to just over 3% by 1983. But <a href="https://www.npr.org/2022/09/29/1125462240/inflation-1970s-volcker-nixon-carter-interest-rates-fed">4 million people lost their jobs</a> in recessions in the early 1980s. </p>
<figure class="align-center ">
<img alt="Paul Volcker, glasses, suit & tie, cigar; in front of microphone, seated at a desk, people and paintings in the background." src="https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=403&fit=crop&dpr=1 600w, https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=403&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=403&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/525455/original/file-20230510-16071-jmyca.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Paul Volcker smokes a cigar while testifying before the House Banking Committee in 1986 during his time as US Federal Reserve Chair.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/washington-dc-usa-february-19-1986-2185750041">mark reinstein/Shutterstock</a></span>
</figcaption>
</figure>
<h2>Three effects of central bank decisions</h2>
<p>Even without such drastic rate changes, such monetary policy decisions affect the wider economy and inflation in three main ways. Economists call these transmission channels.</p>
<p>The most obvious of the three is the <a href="https://www.jstor.org/stable/40722514">interest rate channel</a> because the changes in a central bank’s rates affect other interest rates such as mortgages. Higher rates will translate into higher repayments and less cash to spend on other things. Less spending means that businesses will be reluctant to increase their prices, which should lower inflation.</p>
<p>Interest rates also affect the real economy and inflation through the <a href="https://www.sciencedirect.com/science/article/abs/pii/S0164070406000905">credit channel</a>. It covers lending to both businesses and people. This can be seen through the availability of bank loans, as well as business balance sheets and risk taking. </p>
<p>When interest rates rise, the risk that some borrowers cannot safely repay their debts may increase so much that a bank <a href="https://www.sciencedirect.com/science/article/pii/S2212567112000652">will not lend any more money to them</a>. These borrowers are then forced to stop spending or investing. This helps reduce inflation because less demand for products or services encourages companies to cut prices. </p>
<p>Changes in interest rates also affect <a href="https://www.jstor.org/stable/40268893">firms’ balance sheets</a>. An increase in interest rates lowers the value of things a company owns <a href="https://www.economist.com/briefing/2022/12/08/rising-interest-rates-and-inflation-have-upended-investing">such as a building</a>. In a higher rate environment, the property will be worth less, which matters if a business wants to use it as collateral on a loan for further investment in the business. </p>
<p>The effects of rate decisions on <a href="https://onlinelibrary.wiley.com/doi/10.1111/fima.12256">risk taking</a> is thought to operate in two ways. First, low interest rates boost asset (and collateral) values. This, along with the belief that an increase in asset values will last for a long time, leads both borrowers and banks to accept higher risks. Second, low interest rates make riskier assets more attractive because investors must search for higher yields to make returns. </p>
<p>So, when interest rates are low, banks relax their lending rules, which can lead to an excessive increase in loan supply. This pumps more money into the financial system. Rate increases have the opposite effect.</p>
<h2>Banking crisis fears</h2>
<p>These effects can be seen recently via banking failures, most notably <a href="https://www.theguardian.com/business/2023/mar/17/why-silicon-valley-bank-collapsed-svb-fail">Silicon Valley Bank</a> and <a href="https://www.cnbc.com/2023/04/28/swiss-national-bank-to-face-credit-suisse-and-climate-protests-at-fraught-agm.html">Credit Suisse</a>. While they happened for different reasons, both collapses exposed regulatory failures and poor risk management. Both were also triggered by tightening credit conditions, and by the increase in interest rates related to central bank rate hikes.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/silicon-valley-bank-how-interest-rates-helped-trigger-its-collapse-and-what-central-bankers-should-do-next-201697">Silicon Valley Bank: how interest rates helped trigger its collapse and what central bankers should do next</a>
</strong>
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<p>Such <a href="https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath">financial fragility</a> should be expected in any parts of the banking system that are badly managed, poorly regulated and more exposed to tight credit conditions. This means another banking crisis could happen, especially if central banks continue to tighten monetary policy. </p>
<p>The Bank of England takes all of this into account when deciding on the next move for interest rates. And so, if it has stopped raising rates for now, it’s not because inflation has been tamed but because the risk to the banking industry is too great at the moment.</p><img src="https://counter.theconversation.com/content/205337/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Bank of England is factoring more than sky-high inflation into its base rate decisions right now.Edward Thomas Jones, Lecturer in Economics / Director of the Institute of European Finance, Bangor UniversityYener Altunbas, Professor of Banking, Bangor UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2016192023-03-23T14:57:12Z2023-03-23T14:57:12ZWhy mortgage rates will not return to recent lows any time soon<figure><img src="https://images.theconversation.com/files/517182/original/file-20230323-18-o6h8zl.jpg?ixlib=rb-1.1.0&rect=206%2C98%2C5730%2C3799&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mortgage rates are set to stay high for some time.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/housing-cost-red-house-british-currency-642056482">Ink Drop/Shutterstock</a></span></figcaption></figure><p>The Bank of England base rate <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">has increased steeply</a> from 0.25% in January 2022 to 4.25% in March 2023. More than <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">4 million UK households</a> now have significantly higher mortgage costs as a result, while also dealing with the impact of soaring prices for other items such as food and energy. </p>
<p>This pain will only continue as those households that secured low fixed rates before the recent rake hikes start to roll off their current mortgage deals in the coming months and years. But <a href="https://www.bankofengland.co.uk/statistics/research-datasets#:%7E:text=Inflation%20Attitudes%20Surveys-,Bank%20of%20England/NMG%20household%20survey%20data,-This%20annual%20survey">Bank of England data</a> shows that many UK borrowers expect rates to fall back to recent lows again by 2027. Signals from central banks, continued rising inflation and a relatively improved economic picture, however, mean that such expectations are unlikely to be met any time soon, if ever.</p>
<p>Commercial banks look at a range of factors when setting mortgage rates, particularly for fixed-rate mortgages. For example, mortgage lenders tie their rates closely to long-term (typically five-year) government bond rates because this is where they would invest despositors’ money if they weren’t lending it out to mortgage borrowers. Therefore, when the cost of borrowing for government increases, so do mortgage rates.</p>
<p>Banks also factor in additional risk (called a risk premium) to their mortgage rates. Unlike the Bank of England or the government, households and individuals can default as their mortgage repayments hinge on their financial wellbeing. When calculating this risk, lenders typically consider how much they are lending you versus the deposit you have for a home (called the loan-to-value or LTV ratio), as well as your credit history, ability to make your repayments and future job stability. </p>
<p>The Bank of England’s base rate also plays a key role in your mortgage rate. This is <a href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">the single most important interest rate</a>
in the UK economy because it determines how much the central bank pays the commercial banks that hold money with it. As such, it sets the benchmark for the cost of borrowing and lending and so it determines how banks calculate what you must pay in mortgage interest.</p>
<p>For the 13 years between 2009 and 2021, interest rates were historically low. The Bank of England base rate has not been at this level at any other time in its <a href="https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy/baserate.xls?la=en&hash=EEB8729ABFFF4B947B85C328340AE5155A99AD0F">325-year history</a>.</p>
<p><strong>UK base rate over time:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing changes to the Bank of England base rate over time." src="https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=204&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=204&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=204&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=257&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=257&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516809/original/file-20230321-2560-twi6a4.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=257&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate">Author provided using Bank of England data.</a></span>
</figcaption>
</figure>
<p>Similarly, rates for new mortgages had <a href="https://www.bsa.org.uk/BSA/files/5c/5c180498-5e52-4a41-b022-5821c25f3cbd.pdf">never been below 4%</a> before this time, at least since banking records began in 1853.</p>
<p><strong>Changing mortgage rates:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing changing mortgage interest rates over time." src="https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=200&fit=crop&dpr=1 600w, https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=200&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=200&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=252&fit=crop&dpr=1 754w, https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=252&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/516810/original/file-20230321-3754-zw9gr2.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=252&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><span class="source">Author provided using Building Societies Association data</span></span>
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</figure>
<p>People that bought their first home during this period have never experienced anything other than historically low mortgage rates. This means that the current soaring prices and increasing mortgage costs has been even more of a shock to the system for this group.</p>
<p>There also seems to be an expectation among many borrowers that interest rates will return to historical lows. In a 2022 <a href="https://www.bankofengland.co.uk/statistics/research-datasets#:%7E:text=Inflation%20Attitudes%20Surveys-,Bank%20of%20England/NMG%20household%20survey%20data,-This%20annual%20survey">survey by the Bank of England</a>, 40% of the participants (excluding “don’t know” responses) said they expect the base rate to be below 2% by 2027 – a level rarely seen even in previous low rate periods.</p>
<h2>Why mortgage rates will defy expectations</h2>
<p>So what should you expect from mortgage rates in the coming months and years? Certainly not a return to low rates.</p>
<p>Central banks across the world have been <a href="https://www.bis.org/statistics/cbpol.htm">increasing</a> their interest rates to tackle the sharp surge in inflation. <a href="https://www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent">Many central banks want inflation to be around 2%</a> but it has been recently five times that in the UK and in the European Union. While inflation (caused by recovering economic activity <a href="https://www.imf.org/external/pubs/ft/ar/2022/in-focus/covid-19/">post-COVID</a>, supply chain bottlenecks and the Ukraine invasion) has started to <a href="https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2">slow down</a>, interest rates are unlikely to fall soon for three reasons.</p>
<p>First, at least in the UK, the Bank of England will need to monitor inflation in the coming months – particularly after the most recent unexpected increase in the headline rate <a href="https://www.ft.com/content/c3a1726b-1724-41d8-bde4-94a11d5f5996">to 10.4% in March 2023</a>. </p>
<p>Second, central banks have <a href="https://www.ft.com/content/5d020eb0-eace-4654-907c-b88498056bcd">already been criticised</a> for failing to react quickly enough before last year to suppress inflation. Rather than large interest rate hikes that we saw in the late 1970s, they have chosen to steady increases. Changing this course too quickly could cause credibility issues because it might make them seem indecisive and erratic.</p>
<p>Third, if central banks reduce rates from where they are by a small margin it could make very little difference on the ground for borrowers, but could give mixed signals to the markets. Again, this would dent their credibility. </p>
<figure class="align-center ">
<img alt="Couple calculating bills at home using laptop. Couple working on computer while calculating finances." src="https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/517192/original/file-20230323-17-k5up58.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Financial planning.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/mature-couple-calculating-bills-home-using-2003674967">Ground Picture/Shutterstock</a></span>
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<h2>Fighting inflation</h2>
<p>So does this mean central banks’ have completely given up on the effectiveness of rates as their most trusted inflation-fighting tool? Two recent incidents suggest they are certainly more willing to try methods other than rate cuts at the moment.</p>
<p>When the Bank of England had to <a href="https://www.bankofengland.co.uk/news/2022/september/bank-of-england-announces-gilt-market-operation">intervene</a> following the UK’s <a href="https://theconversation.com/emergency-budget-announcement-expert-reaction-to-new-uk-chancellors-attempt-to-calm-financial-markets-192669">mini-budget saga</a> to support financial institutions, it used other means, namely quantitative easing. It purchased sovereign bonds to increase the flow of money into the financial system rather than lowering rates.</p>
<p>More recently, amid the ongoing financial turmoil around the Credit Suisse <a href="https://www.bloomberg.com/news/features/2023-03-20/credit-suisse-ubs-takeover-how-a-166-year-old-bank-collapsed?leadSource=uverify%20wall">takeover</a>, the European Central Bank and the US Federal Reserve have gone <a href="https://theconversation.com/the-european-central-bank-seems-to-have-got-away-with-raising-interest-rates-in-the-middle-of-a-banking-crisis-heres-why-202052">ahead with increases</a> in their key policy rates. </p>
<p>Further, the ECB has <a href="https://www.ecb.europa.eu/press/pr/date/2023/html/ecb.mp230316%7Eaad5249f30.en.html">continued to scale back</a> its quantitative easing programme and declared the European banking sector to be <a href="https://www.bankingsupervision.europa.eu/press/pr/date/2023/html/ssm.pr230320%7E9f0ae34dc5.en.html">resilient, with robust levels of capital and liquidity</a>. These announcements reflect a lack of desire to use rate cuts to ease market turmoil.</p>
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<em>
<strong>
Read more:
<a href="https://theconversation.com/silicon-valley-bank-biggest-us-lender-to-fail-since-2008-financial-crisis-a-finance-expert-explains-the-impact-201626">Silicon Valley Bank biggest US lender to fail since 2008 financial crisis – a finance expert explains the impact</a>
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<p>So, there is no sign that any of the major central banks plan to lower interest rates any time soon. While the governments’ cost of borrowing in some of these countries have come down lately, compared to the last decade they are still <a href="https://uk.investing.com/rates-bonds/uk-5-year-bond-yield">relatively high</a>. Since interest rates for businesses and households are decided partly based on these bonds, it means mortgage payments may not come down significantly in the foreseeable future either.</p>
<p>And of course, the improving economic outlook in both the <a href="https://obr.uk/efo/economic-and-fiscal-outlook-march-2023/">UK</a> and <a href="https://www.ecb.europa.eu/press/pressconf/shared/pdf/ecb.ds230316%7E34822c9f1d.en.pdf">Europe</a> – with better growth figures now expected for later this year versus four months ago – also reduces pressure to cut interest rates.</p><img src="https://counter.theconversation.com/content/201619/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>UK borrowers are expecting mortgage rates to fall again. Here’s why this looks unlikely in the current economic environment.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldMuhammad Ali Nasir, Associate Professor in Economics, University of LeedsLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1963272023-01-16T18:11:54Z2023-01-16T18:11:54ZFive ways to reduce your mortgage repayments in 2023 – and why rates have risen so high<figure><img src="https://images.theconversation.com/files/504639/original/file-20230116-22-bzn80r.jpg?ixlib=rb-1.1.0&rect=31%2C8%2C943%2C556&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Many people are trying to tighten their belts right now.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/our-debt-almost-paid-off-cropped-2129742779">PeopleImages.com - Yuri A/Shutterstock</a></span></figcaption></figure><p>Around 4 million UK households will <a href="https://www.bankofengland.co.uk/financial-stability-report/2022/december-2022">face higher mortgage costs in 2023</a> with average monthly payments expected to increase from £750 to £1,000.</p>
<p>Banks’ lending rates are <a href="http://bankofengland.education/mortgage-rates/index.html">directly influenced</a> by the Bank of England’s base rate, which rose nine times in the year to December 2022 to 3.5% and is <a href="https://www.ft.com/content/955b568a-c924-421a-bc0f-caa85d37007b">expected to reach around 4.5%</a> in 2023. Mortgage rates are even higher than this base rate because banks add a premium to account for the risk of borrowers not repaying their home loans. Average mortgage rates are now around <a href="https://www.bankofengland.co.uk/statistics/visual-summaries/quoted-household-interest-rates">6% versus 1.9% in early 2022</a>. </p>
<p>Households with variable-rate mortgages, which adjust as the base rate rises, are already feeling this change. But in 2023 around 1.8 million people with fixed-rate mortgages will come to the end of their current deals. They face an even greater shock because their payments will shoot up almost overnight.</p>
<p>Mortgage costs <a href="https://www.standard.co.uk/homesandproperty/buying-mortgages/london-homeowners-mortgage-payments-third-of-income-b1033570.html">currently make up 22% of the average UK household budget</a>, so it’s important for those looking for a new deal or trying to remortgage to understand how mortgage payments work. This will not only help you choose the best deal but could also help reduce your repayment burden.</p>
<h2>How mortgage repayments work</h2>
<p>Mortgage payment calculations are complex, so use a <a href="https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/">mortgage calculator</a> (available from your bank or <a href="https://www.moneyhelper.org.uk/en/homes/buying-a-home/mortgage-calculator">online</a>). I used one <a href="https://www.mortgagecalculator.uk/">to calculate repayments</a> for John, a fictional homeowner borrowing £100,000 to buy a house worth £110,000 (so he has a £10,000 deposit). John chooses a one-year fixed-rate mortgage with a 2% interest rate and a repayment term of 20 years. </p>
<p>This is a <a href="https://www.moneyhelper.org.uk/en/homes/buying-a-home/mortgage-repayment-options">repayment mortgage</a> so John’s payments to the bank comprise two parts: the interest (the amount the bank charges John to lend him the money) and the capital repayment (which covers the total amount – £100,000 – the bank lent to John for his house). </p>
<p>His monthly payments will be nearly £506.</p>
<figure class="align-center ">
<img alt="Table showing mortgage details & repayments for a 2% interest rate." src="https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=199&fit=crop&dpr=1 600w, https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=199&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=199&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=249&fit=crop&dpr=1 754w, https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=249&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/504470/original/file-20230113-20-ewniaw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=249&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.mortgagecalculator.uk">Data from www.mortgagecalculator.uk</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Looking at the breakdown of yearly payments, John will pay over £1,962 in interest for the year that his rate is fixed at 2% (marked in red below) – an average of £164 per month. </p>
<figure class="align-center ">
<img alt="Table showing interest and capital paid and mortgage balance, yearly" src="https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=119&fit=crop&dpr=1 600w, https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=119&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=119&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=149&fit=crop&dpr=1 754w, https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=149&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/504467/original/file-20230113-25-2c1u6u.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=149&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.mortgagecalculator.uk">Data from www.mortgagecalculator.uk</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>For the capital repayment, John will pay back just over £4,108 of the amount he borrowed (in blue above) in the year he has fixed his rate at 2%, for an average monthly capital payment of £342.</p>
<p>But, because he has a one-year fixed-rate mortgage, John will have to remortgage in 12 months. So what would happen if interest rates had increased by then to 5%, for example?</p>
<p>Subtracting the £4,108, John’s mortgage amount would be £95,892 and the term would be 19 years, while his new monthly payment would be just over £652.</p>
<figure class="align-center ">
<img alt="A table showing mortgage details for a 5% rate and a monthly repayment total of £652.33" src="https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=199&fit=crop&dpr=1 600w, https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=199&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=199&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=250&fit=crop&dpr=1 754w, https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=250&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/504474/original/file-20230113-20-tl2i65.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=250&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.mortgagecalculator.uk/">Data from www.mortgagecalculator.uk</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>John will be shocked to see his interest payments have jumped to slightly above £4,724 – £394 monthly on average versus £164 during his last mortgage. He will also be paying less capital back now (about £3,103 for the year versus £4,108 before his rate rose):</p>
<figure class="align-center ">
<img alt="Table showing new interest and capital paid, and mortgage balance, with a 5% interest rate." src="https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=124&fit=crop&dpr=1 600w, https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=124&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=124&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=155&fit=crop&dpr=1 754w, https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=155&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/504696/original/file-20230116-16-kra1tp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=155&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="http://www.mortgagecalculator.uk">Data from www.mortgagecalculator.uk</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>But if John lived in a different area, he could be paying even more. With a £200,000 mortgage – <a href="https://www.statista.com/statistics/915977/average-value-of-mortgage-granted-in-the-united-kingdom/">closer to the UK average</a> – the monthly interest payment would increase from £327 to £822 if rates jumped from 2% to 5%.</p>
<p>So is there any way to soften the blow of rising mortgage rates? If you do your homework it might be possible to reduce your mortgage payments, depending on your household’s specific circumstances. </p>
<p>Here are five ways it’s possible to reduce your mortgage burden <em>(please note, the following information is not financial advice)</em>:</p>
<h2>1. Consider your mortgage options</h2>
<p>There is a range of things you could do to provide temporary relief during the current economic downturn – but always remember to ask your lender for details of fees incurred for any changes. </p>
<p>For example, temporary options include switching to <a href="https://www.unbiased.co.uk/discover/mortgages-property/buying-a-home/what-is-an-interest-only-mortgage-how-do-repayments-work">interest-only repayments</a> for some short-term flexibility – but remember you must still plan to pay off the capital borrowed. Or extending your mortgage term so you pay less per month but over a longer period. If John extended his term from 19 to 30 years, for example, his monthly capital repayment would drop from £259 to £177.</p>
<p>You could also use some savings to reduce your loan amount while borrowing rates are high. Borrowing 90% of your house price (that is, you have a 10% deposit), will probably incur a higher interest rate than if you can put down a 25% deposit. And once you have a mortgage, overpaying whenever possible will cut your interest payments.</p>
<h2>2. Avoid the standard variable rate</h2>
<p>Once your fixed-rate period ends, your mortgage usually automatically moves to the lender’s standard variable rate – often the highest rate charged. Try to secure a new deal before your current rate ends to avoid this.</p>
<h2>3. Keep your help-to-buy loan</h2>
<p>If you bought your home with the government’s <a href="https://www.gov.uk/help-to-buy-equity-loan">help-to-buy scheme</a> (no longer available to new borrowers) it may be worth keeping it, rather than moving to a new mortgage provider once the interest-free period ends. This is because <a href="https://www.moneyhelper.org.uk/en/homes/buying-a-home/help-to-buy-scheme-everything-you-need-to-know">interest rates charged by these schemes</a> are currently much less than market mortgage rates.</p>
<p>But probably the best thing you can do, especially if struggling financially, is to speak to someone.</p>
<h2>4. Use a mortgage adviser</h2>
<p>Independent mortgage advisers often have access to better mortgage rates than those available to anyone on the internet or from a high street bank, for example. For a £200,000 mortgage over 20 years, for example, a 5% rate versus 5.25% would save you around £500 a year.</p>
<h2>5. Talk to your lender</h2>
<p>Many UK banks <a href="https://www.ft.com/content/456b41ec-ae6f-48c5-b4e2-d35c877799e8">pledged to ease pressure on struggling mortgage holders</a> last year. This means that if you are struggling or worried about your finances, your bank may be able to help you switch to a more suitable deal without having to take another affordability test, for example. </p>
<p>Your bank needs to know that you’re worried in advance, so keep an eye on your finances. And while it’s best to speak up before you miss a payment, even if you fail to do so, you can still seek help and advice from your bank or other services such as <a href="https://www.citizensadvice.org.uk/debt-and-money/mortgage-problems-debt-and-money/how-to-sort-out-your-mortgage-problems/">Citizens Advice</a>.</p><img src="https://counter.theconversation.com/content/196327/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alper Kara does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Mortgage rates – and repayments – have risen significantly since this time last year.Alper Kara, Professor and Head of Department - Accounting, Finance and Economics, University of HuddersfieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1926302023-01-02T05:35:17Z2023-01-02T05:35:17ZBorrowing money isn’t always a bad thing – debt can be a sensible way to build wealth<figure><img src="https://images.theconversation.com/files/490103/original/file-20221017-8499-t9lss5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Debt, in some form or another, is part of our financial profiles whether we like it or not. And it can be a useful way to build wealth if it is managed carefully and wisely.</p>
<p>For example, you may borrow money from the bank to buy an asset – a resource of economic value that generates income from its productive use. Investment property is an example.</p>
<p>So investing in an income-producing property can be a good idea.</p>
<p>If you are already in the property market, the home equity you’ve accumulated – the share of the property value that’s yours – can help you buy a second property. This time, you may not need a deposit as big as the initial investment. </p>
<p>In the event that the rental market is booming and your tenants pay you more than what you repay on the loan, municipal rates and property manager fees, then the wealth-building machine will start to run itself.</p>
<p>But debt makes many people uncomfortable. </p>
<p>In South Africa, a person earning R20,000 a month commits on average <a href="https://businesstech.co.za/news/finance/585372/south-africas-middle-class-is-in-serious-trouble-right-now/">63% of their salary to repaying unsecured debt</a> – such as credit cards, personal loans, overdrafts or “buy now, pay later” facilities. As a general guideline, it’s suggested that <a href="https://www.investopedia.com/terms/d/dti.asp">no more than 40%</a> of your income should be used to service debt. </p>
<p>Financial anxiety has its roots in some misconceptions. The main one is that all debt is bad. This isn’t true. Prudent borrowing to buy an asset can help build wealth in the medium to long term. So fears about debt need to be weighed against a broader understanding of wealth accumulation. Well-managed debt can play a role in that process.</p>
<p>Here are the four biggest misconceptions about debt. Recognising them will help you develop a more nuanced approach to debt.</p>
<h2>The misconceptions</h2>
<p><strong>All debt is bad debt.</strong></p>
<p>Indeed, debt is a problem when you can no longer manage it and it starts to manage you. One of the simplest ways to tell whether debt is working for you or against you is through “leveraging”. This refers to the use of debt to acquire an asset that is worth more than the value of the debt. It’s also known as positive or favourable leveraging.</p>
<p>People who take out unsecured loans are leveraging unfavourably when the debt is driven by consumption. Often there’s nothing to show for what you’ve spent. Unsecured loans also tend to charge higher interest rates to compensate for the lack of collateral.</p>
<p><strong>Only financially reckless people are in debt.</strong></p>
<p>This is the next misconception. Second to unsecured loans, most South African consumer debt portfolios are taken up by <a href="https://businesstech.co.za/news/wealth/617685/these-income-levels-in-south-africa-owe-the-most-debt/">home loans</a>. The most realistic way to gain entry into the housing market is through a mortgage. You’re doing the right thing if your mortgage is paid off within a reasonable time. This will mean that, in the long term, the value of the property will surpass the home loan amount that was taken out to buy the property in the first place.</p>
<p>But there are two misconceptions related specifically to mortgages.</p>
<p><strong>After you’ve paid the mortgage deposit, you won’t have other fees to pay.</strong></p>
<p>This isn’t correct. Banks charge a fee to open and close a home loan account. There can also be a penalty when a home loan is repaid prematurely. So be sure to read the fine print about discharge fees or closing costs.</p>
<p><strong>If you stick to the repayment amount for your mortgage, you’ll be able to repay the loan quickly.</strong></p>
<p>This isn’t true – even if interest rates fall and your mortgage repayments decline, your home loan is most likely tied to a loan term of 20 to 30 years. Many banks will quote a monthly mortgage repayment amount that seems affordable at face value but is in fact based on a 20-year term period. </p>
<p>Banks are businesses and it works in their favour if you take longer to repay your mortgage because that translates into more interest repayments. The longer the duration of the home loan, the more interest you pay, the more profit they make. </p>
<p>If it takes over 20 years to repay a bond, it’s often the case that the value of the interest repayments exceeds the initial loan amount. </p>
<p>Home loan calculators are a useful tool that can help you assess how much you could afford to repay on a home loan depending on the deposit saved, if interest rates change and how long it will take you to repay the mortgage with topped-up contributions. </p>
<p>It is essential to have a goal for when you’d like to finish paying off your mortgage and a plan in place to achieve this goal. If you don’t do this you could become a mortgage prisoner.</p>
<h2>Keeping your eye on the prize</h2>
<p>As we’re about to conclude the year and enter the festive season, it’s a good time to remember your financial goals and not let your guard down by unconsciously swiping or tapping that credit card.</p>
<p>“Janu-worry” is around the corner, and so is the financial anxiety that comes with it. But it need not be the case. Debt can either be the cure or the cause of your financial position. Reconsider spending patterns that prompt you to use your credit card. Too much debt over short periods is an irregular spending pattern that is a warning sign. </p>
<p>There’s no harm in buying what you can afford or staying in your financial lane if the alternative forces you to sacrifice your hard-earned income on servicing consumption-driven debt. </p>
<p>For better or worse, debt is a part of our financial portfolios. But the road to financial empowerment is not always easy – financial planning can help you keep your eye on the prize.</p><img src="https://counter.theconversation.com/content/192630/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bomikazi Zeka works for the University of Canberra and does not use this platform, or any other, to provide financial advice. </span></em></p>For better or worse, debt is a part of everybody’s financial portfolios. Solid financial planning will help you keep your eye on the prize of wealth accumulation.Bomikazi Zeka, Assistant Professor in Finance and Financial Planning, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1965192022-12-13T16:53:57Z2022-12-13T16:53:57ZFive reasons why interest rates can’t go much higher<p>It’s decision time for central banks on interest rates again. The US Federal Reserve and European Central Bank (ECB) are set to announce their latest decisions on Wednesday 14, while the Bank of England (BoE) will go a day later. </p>
<p>After years of ultra-loose monetary policies, the Fed in particular has been aggressively raising interest rates during 2022 <a href="https://www.euronews.com/next/2022/11/30/record-inflation-which-country-in-europe-has-been-worst-hit-and-how-do-they-compare">to counteract</a> the <a href="https://www.bls.gov/opub/ted/2022/consumer-prices-up-9-1-percent-over-the-year-ended-june-2022-largest-increase-in-40-years.htm">inflation surge</a>. All three central banks increased their benchmark rates by 0.75 points at their meetings in late October/early November. </p>
<p><strong>Base rates in US, UK and eurozone</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Chart showing interest rates in US, UK and eurozone" src="https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=309&fit=crop&dpr=1 600w, https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=309&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=309&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=388&fit=crop&dpr=1 754w, https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=388&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/500738/original/file-20221213-19390-oz0t5e.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=388&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">US = blue; UK = orange; eurozone = turquoise.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/">TradingView</a></span>
</figcaption>
</figure>
<p><a href="https://www.richmondfed.org/publications/research/econ_focus/2022/q3_federal_reserve">The Fed</a> and <a href="https://www.ft.com/content/64e5dcdd-42a8-4013-a3bd-75a62cf8e6dc">BoE</a> have also been reducing the amount of money in the economy through what is known as quantitative tightening. This involves removing the money they “created” via quantitative easing, and the <a href="https://www.reuters.com/markets/europe/ecb-start-offloading-debt-fight-inflation-2022-12-02/">ECB is likely</a> to follow suit. </p>
<p>It is widely expected that the central banks will further increase rates at their latest meetings, but potentially at a slower rate of 0.5 points. Fed Chair <a href="https://www.reuters.com/markets/us/feds-powell-rate-hike-slowdown-possible-next-month-inflation-fight-far-over-2022-11-30/">Jay Powell signalled</a> a probable slowdown a couple of weeks ago, causing markets to surge in response. On the <a href="https://www.ft.com/content/ea6edbc9-2ee6-4e8a-8289-4ee071260d60">other hand</a>, there is still pressure to stay aggressive to keep on top of inflation: UK wage growth is a worry, for instance. </p>
<p>It boils down to a question of how many rate rises the world economy can take. Here’s what the potential damage looks like: </p>
<h2>1. Consumption</h2>
<p>Higher interest rates force people to pay more to service their debts, including mortgages, car loans, credit cards and more. With many debts, the damage is staggered because of short-term fixed rates below today’s market rates. But to take UK mortgages as an example, it is <a href="https://www.resolutionfoundation.org/press-releases/britains-26-billion-mortgage-hike-five-million-households-set-for-average-mortgage-bill-increases-of-5100-by-end-of-2024/#:%7E:text=Over%20five%20million%20families%20are,Saturday)%20by%20the%20Resolution%20Foundation">estimated that</a> the average household will be forking out an extra £425 a month by the end of 2024. In London, the average increase will be closer to £700. </p>
<p>In a largely stagnant economy where wages are not keeping up with inflation, spending more on debts means cutting back on consumption – particularly on unessential spending such as holidays, luxury clothes or new cars. Companies will therefore produce less, sell less and earn less, causing two nasty chain reactions in the global economy: higher unemployment and slower growth. The silver lining is that it will probably reduce inflation faster.</p>
<h2>2. Falling house prices</h2>
<p>An oft-repeated mantra is that house prices cannot fall when there’s a limited supply of properties coming on the market. It’s not true, though. With mortgages getting more expensive, people can’t afford to pay as much for a house. Even if there are dozens of buyers competing for a property, each will bid lower than a year ago. The average buyer’s borrowing capacity is even more important than the number of buyers in the market. </p>
<p>Higher interest rates could make rentals unprofitable for buy-to-let landlords, particularly since they typically pay higher interest rates than ordinary homeowners. A percentage of these landlords will sell, creating a temporary spike in the supply of properties on the market. </p>
<p>There’s also a self-fulfilling prophecy in that the more is written about falling prices, the more sellers will discount to sell quickly. Indeed, property prices have <a href="https://www.forbes.com/uk/advisor/personal-finance/2022/12/12/house-prices-updates/#:%7E:text=Price%20falls%20of%20up%20to,home%20now%20costs%20%C2%A3261%2C600">already started</a> to fall. UK house prices fell by <a href="https://www.fidelity.co.uk/markets-insights/markets/uk/why-are-houses-prices-falling/">more than 2%</a> in November, their third consecutive monthly fall and the sharpest since 2008. In the UK and also the US, analysts predict <a href="https://www.forbes.com/advisor/mortgages/real-estate/housing-market-predictions/">5% to 10% falls</a> within the next couple of years.</p>
<h2>3. Developing country defaults</h2>
<p>Most developing countries owe their debt in US dollars, not their local currency. Higher interest rates have strengthened the dollar – at least until it <a href="https://www.marketwatch.com/investing/index/dxy">eased off recently</a> – which has made their financial positions worse. This makes them seem like a riskier prospect to investors, making it more expensive for them to borrow on the international markets. </p>
<p>It doesn’t help that many developing countries already have weakened public finances due to the pandemic. And the prospect of falling global consumption, an impending recession and <a href="https://www.ey.com/en_cn/automotive-transportation/why-global-industrial-supply-chains-are-decoupling">reduced investment</a> is <a href="https://www.nytimes.com/2022/12/03/business/developing-countries-debt-defaults.html">not improving</a> their credentials. </p>
<p><a href="https://www.bbc.co.uk/news/business-61505842">Sri Lanka</a> has already defaulted on its debts, and numerous other countries <a href="https://blogs.worldbank.org/voices/are-we-ready-coming-spate-debt-crises">may soon follow</a>. Their citizens can expect hyperinflation, deep recessions and excessive taxes in the battle to get finances under control. It <a href="https://www.reuters.com/business/argentinas-economic-crisis-whack-a-mole-goes-into-overdrive-2022-06-28/">can take years</a> or even decades to recover, causing severe hardship. </p>
<h2>4. Falling markets</h2>
<p>Just like property prices are affected by tighter monetary policies, the same is true of financial assets in general. Higher rates make it more lucrative to save money and invest in bonds, which makes it less tempting to invest in the stock market and other riskier assets. The prospect of reduced consumption and higher unemployment does not encourage investors to take risks either. </p>
<p><strong>S&P 500 chart</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="S&P 500 chart" src="https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/500773/original/file-20221213-16226-ha011x.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.tradingview.com/">TradingView</a></span>
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<p>This is why financial markets have <a href="https://investorplace.com/2022/10/stock-predictions-2022-when-will-stocks-go-back-up/">declined significantly</a> during 2022 – and why <a href="https://www.reuters.com/markets/global-markets-outlook-urgent-2022-11-28/">they rallied</a> on the news that rate hikes might decelerate. <a href="https://www.fitchratings.com/research/banks/major-european-banks-face-weaker-profits-after-strong-2021-31-03-2022">Banks have suffered</a> over the past year because of a decline in stock market returns, while those in Europe have also been exposed to the Russia sanctions. </p>
<h2>5. Political instability</h2>
<p>Economic developments tend to be followed by political ones. From the French revolution to the <a href="https://www.businessinsider.com/ukraine-russia-bread-food-prices-civil-unrest-arab-spring-egypt-2022-3?r=US&IR=T#:%7E:text=Food%20scarcity%20also%20played%20a,with%20corrupt%20political%20systems%20peaked">Arab spring</a>, high food prices have stirred revolutions. Brexit in the UK and the election of Donald Trump were also arguably reactions to economic insecurity. </p>
<p>So the higher that interest rates rise, the greater the risk of political instability. Don’t be surprised if citizens ramp up their opposition to global elites and weak groups such as <a href="https://www.amnesty.org/en/latest/news/2021/10/sri-lanka-authorities-must-end-violence-and-discrimination-against-muslims/">minorities and migrants</a>. Also expect more populism and governments resorting to distractions such as <a href="https://www.theguardian.com/world/2022/nov/20/turkey-confirms-airstrikes-kurdish-groups-syria-iraq-bombing">nationalist wars</a>.</p>
<h2>The role of governments</h2>
<p>Central banks will only actually reduce interest rates once inflation comes back to low levels. In the meantime, the global economy needs steady and wise governments to minimise the damage. </p>
<p>Loan repayment holidays for struggling households and otherwise healthy businesses can certainly help. Food banks and free school meals are also essential, while governments need to have the courage to make <a href="https://www.theguardian.com/us-news/2022/apr/13/wealthiest-americans-tax-income-propublica-investigation">billionaires</a>, <a href="https://www.prospectmagazine.co.uk/politics/uk-tax-corporate-rate-amazon-facebook-zero-havens">multinationals</a> and <a href="https://www.landlordtoday.co.uk/breaking-news/2021/10/hmrc-discovers-huge-numbers-of-landlords-avoiding-paying-tax">even landlords</a> pay their fair share of tax. Without policies like these, the next couple of years will be harder than is necessary.</p><img src="https://counter.theconversation.com/content/196519/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Central bankers are set to slow down their rate hikes.Alexander Tziamalis, Senior Lecturer in Economics, Sheffield Hallam UniversityJean-Philippe Serbera, Associate professor in Finance, ESC PauLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1940352022-11-08T23:06:22Z2022-11-08T23:06:22ZNegative equity is looming for some home owners – but you only need to worry if you need to sell<figure><img src="https://images.theconversation.com/files/494287/original/file-20221108-12-r7t3am.jpg?ixlib=rb-1.1.0&rect=17%2C49%2C2968%2C2110&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>It feels like a perfect storm is building. The rising cost of living and higher interest rates are putting household budgets under stress, and falling house prices could push some home owners into negative equity. </p>
<p>On the one hand, the drop in house prices is a good thing as it makes housing more affordable, particularly for young people – and we want that. </p>
<p>But every transaction has two sides. Dropping house prices are bad for those who need or want to sell their house, or who hold most of their wealth in their home. These people are now markedly poorer. </p>
<p>In September 2017, the <a href="https://www.qv.co.nz/price-index/">average house in New Zealand cost NZ$666,518</a>. By January 2022, prices had peaked at $1,063,765. But by September 2022, the average house price had slipped to $956,592. The downward trend may continue for a while yet. </p>
<p>Some 32% of New Zealand households have a <a href="https://www.stats.govt.nz/news/mortgages-and-other-real-estate-loans-drive-household-debt-up/">mortgage on the primary residence</a>, with the median property debt increasing to $260,000 in the year ended June 2021, up $56,000 over the past three years.</p>
<h2>A looming threat</h2>
<p>For most home owners, a small or even moderate fall in the value of their home won’t make any practical difference. Their house will still probably be worth more now than it was two years ago and it will still be worth more than their mortgage.</p>
<p>However, for those whose mortgage is a high fraction of the value of their home – those who bought property in 2021 when rates were low and house prices high, for example – the risk is that they will fall into negative equity. </p>
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Read more:
<a href="https://theconversation.com/what-happens-if-i-cant-pay-my-mortgage-and-what-are-my-options-188891">What happens if I can't pay my mortgage and what are my options?</a>
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<p>A borrower enters negative equity if the value of their home drops below the value of their mortgage. </p>
<p>For around 2% of New Zealand mortgage holders, this threat <a href="https://www.theguardian.com/world/2022/nov/05/new-zealand-the-kiwi-in-the-coalmine-as-house-prices-slump-and-repayments-rise">has become a reality</a>.</p>
<p>But is it time to panic? Well, probably not. As long as you don’t need to sell your house and you can sustain your mortgage payments, then negative equity doesn’t matter all that much. You can just wait it out. </p>
<p>That said, negative equity can become more of an issue when other economic issues – rising inflation, unemployment or interest rates – rear their heads.</p>
<h2>Contributing risk factors</h2>
<p>Lets start with interest rates. Rising interest rates are making debt more expensive. Local media are already publishing stories of <a href="https://www.stuff.co.nz/business/130353910/no-money-in-negative-equity-and-facing-double-interest-costs-a-year-after-buying-first-home">white collar workers struggling to pay their mortgages</a>. </p>
<p>Yes, interest rates are rising but they are still relatively low. The floating rate for a first mortgage is currently 6.8%. Prior to the 2008 global financial crisis (GFC), this interest rate tier <a href="https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/retail-interest-rates-on-lending-and-deposits">hit a peak of 10.9%</a>. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1589712636924825600"}"></div></p>
<p>That said, interest rates fell over the course of the GFC, while rates are currently rising. Furthermore, the level of debt held by many households is now higher since people had to take on bigger mortgages as house prices rose. Bigger debt levels makes higher interest rates harder to cope with.</p>
<p>Unemployment will make negative equity a bigger issue. Currently, New Zealand’s <a href="https://www.stats.govt.nz/indicators/unemployment-rate/">unemployment rate is historically low</a>, meaning most people with a mortgage can feel relatively secure in their job or job prospects. </p>
<p>But it won’t stay there. </p>
<p>The low unemployment makes it harder for the Reserve Bank of New Zealand (RBNZ) to rein in inflation, particularly if wages continue to rise. The RBNZ has been clear that New Zealand needs to get ready for a rise in unemployment, with some economists saying 50,000 New Zealanders would need to <a href="https://www.stuff.co.nz/business/129960960/50000-people-may-need-to-lose-their-jobs-to-bring-inflation-under-control">lose their jobs to bring inflation under control</a>.</p>
<p>Rises in both unemployment and interest rates at the same time will increase the chance that some highly-leveraged mortgage holders get into problems.</p>
<figure class="align-center ">
<img alt="Adrian Orr in front of microphones and Reserve Bank sign" src="https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494285/original/file-20221108-11358-acv2x.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Reserve Bank Governor Adrian Orr has warned that inflation must come down – and this could mean difficulty for some borrowers.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com.au/detail/news-photo/reserve-bank-governor-adrian-orr-speaks-during-a-press-news-photo/1212617885?phrase=Adrian%20Orr&adppopup=true">Getty Images</a></span>
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<h2>Did we learn from the GFC?</h2>
<p>Negative equity was a big problem during the 2008 GFC as house prices fell and banks accumulated bad loans. This issue hit the United States and parts of Europe particularly hard. </p>
<p>But that doesn’t mean we are heading to the same place now.</p>
<p>Following the 2008 crisis, New Zealand’s lending rules changed, requiring banks to be more cautious when lending. In 2021, these rules were <a href="https://www.consumerprotection.govt.nz/general-help/consumer-laws/credit-contracts-and-consumer-finance-act/">refined even further</a>. The number of low-equity loans that banks could make was reduced and banks had to look more closely at a borrower’s ability to repay debt. </p>
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Read more:
<a href="https://theconversation.com/fighting-inflation-doesnt-directly-cause-unemployment-but-thats-still-the-most-likely-outcome-193617">Fighting inflation doesn’t directly cause unemployment – but that's still the most likely outcome</a>
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<p>Some of these requirements have certainly made it harder for first home buyers, perhaps overly so, but it has reduced the risk in our financial system. </p>
<p>This time around there will be fewer borrowers with mortgages that are a high fraction of the value of their house and fewer who can’t manage higher mortgage repayments.</p>
<p>Banks also have no incentive to push people into a default on their mortgage. This is especially true when there is negative equity. The bank doesn’t win if they force the sale of a home and get back less than they were owed. And the headline “Bank evicts mum with two toddlers” never plays well. </p>
<p>So expect banks to work hard with any struggling mortgage holders to help them keep paying the mortgage. </p>
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<p>The immediate future is not going to be pleasant for many borrowers. The RBNZ must get inflation down. Doing that will not be easy and homeowners should prepare for higher interest rates.</p>
<p>But negative equity is not a problem providing you don’t need to sell your house and you can afford to pay your mortgage. </p>
<p>Even if unemployment rises to 7%, which is just above the post GFC peak, that would still mean a 93% employment rate. Most people will be in work, living in their house and paying their mortgage – even those with negative equity.</p><img src="https://counter.theconversation.com/content/194035/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Stephen Hickson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What happens when you owe more on your mortgage than your house is worth? Negative equity is a growing concern for some homeowners, but how real are the risks?Stephen Hickson, Economics Lecturer and Director Business Taught Masters Programme, University of CanterburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1930052022-11-03T12:00:53Z2022-11-03T12:00:53ZA brief history of the mortgage, from its roots in ancient Rome to the English ‘dead pledge’ and its rebirth in America<figure><img src="https://images.theconversation.com/files/492228/original/file-20221028-27-xjagjx.jpg?ixlib=rb-1.1.0&rect=280%2C16%2C5155%2C3337&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Mortgages can haunt homeowners.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/illustration-of-a-mortgage-monster-looming-over-a-family-news-photo/584042598?phrase=mortgage%20homes&adppopup=true">GraphicaArtis/Getty Images</a></span></figcaption></figure><p>The average interest rate for a new U.S. <a href="https://www.cbsnews.com/news/home-loan-mortgage-interest-rate-7-percent-highest-since-2001/">30-year fixed-rate mortgage topped 7% in late October 2022</a> for the first time in more than two decades. It’s a sharp increase from one year earlier, when <a href="https://www.valuepenguin.com/mortgages/historical-mortgage-rates">lenders were charging homebuyers only 3.09%</a> for the same kind of loan. </p>
<p>Several factors, including <a href="https://www.nerdwallet.com/article/mortgages/fed-mortgage-rates">inflation rates and the general economic outlook</a>, influence mortgage rates. A primary driver of the ongoing upward spiral is the <a href="https://abc7chicago.com/fed-interest-rate-decision-today-hike-federal-reserve-meeting-november/12408055/">Federal Reserve’s series of interest rate hikes</a> intended to tame inflation. Its decision to increase the benchmark rate by <a href="https://www.federalreserve.gov/newsevents/pressreleases/monetary20221102a.htm">0.75 percentage points on Nov. 2, 2022</a>, to as much as 4% will propel the cost of mortgage borrowing even higher.</p>
<p>Even if you have had mortgage debt for years, you might be unfamiliar with the history of these loans – a subject I cover <a href="https://scholar.google.com/citations?user=KVv47noAAAAJ&hl=en&oi=ao">in my mortgage financing course</a> for undergraduate business students at Mississippi State University.</p>
<p>The term dates back to <a href="https://www.english-heritage.org.uk/learn/story-of-england/medieval/">medieval England</a>. But the roots of these legal contracts, in which land is pledged for a debt and will become the property of the lender if the loan is not repaid, go back thousands of years. </p>
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<h2>Ancient roots</h2>
<p>Historians trace the <a href="https://www.kingjamesbibleonline.org/Nehemiah-5-3/">origins of mortgage contracts</a> to the reign of King Artaxerxes of Persia, who ruled modern-day Iran in the fifth century B.C. The Roman Empire formalized and documented the legal process of pledging collateral for a loan. </p>
<p>Often using the <a href="https://www.biblegateway.com/passage/?search=John%202%3A13-16&version=NIV">forum and temples as their base of operations</a>, <em>mensarii</em>, which is derived from the word <em>mensa</em> or “bank” in Latin, would set up loans and charge <a href="https://www.biblegateway.com/passage/?search=John%202%3A13-16&version=NIV">borrowers interest</a>. These government-appointed public bankers required the borrower to put up collateral, whether real estate or personal property, and their agreement regarding the use of the collateral would be handled in one of three ways. </p>
<p>First, the <a href="https://www.merriam-webster.com/dictionary/fiducia"><em>Fiducia</em></a>, Latin for “trust” or “confidence,” required the transfer of both ownership and possession to lenders until the debt was repaid in full. Ironically, this arrangement involved no trust at all.</p>
<p>Second, the <a href="https://www.merriam-webster.com/dictionary/pignus"><em>Pignus</em></a>, Latin for “pawn,” allowed borrowers to retain ownership while <a href="https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=1684&context=penn_law_review">sacrificing possession and use</a> until they repaid their debts. </p>
<p>Finally, the <a href="https://legaldictionary.lawin.org/hypotheca/"><em>Hypotheca</em></a>, Latin for “pledge,” let borrowers retain both ownership and possession while repaying debts. </p>
<h2>The living-versus-dead pledge</h2>
<p><a href="https://www.britannica.com/biography/Claudius-Roman-emperor">Emperor Claudius</a> brought Roman law and customs to Britain in A.D. 43. Over the next <a href="https://www.english-heritage.org.uk/learn/story-of-england/romans/">four centuries of Roman rule</a> and the <a href="https://www.english-heritage.org.uk/learn/story-of-england/early-medieval/">subsequent 600 years known as the Dark Ages</a>, the British adopted another Latin term for a pledge of security or collateral for loans: <a href="https://worldofdictionary.com/dict/latin-english/meaning/vadium"><em>Vadium</em></a>.</p>
<p>If given as collateral for a loan, real estate could be offered as “<a href="https://www.merriam-webster.com/dictionary/vadium%20vivum"><em>Vivum Vadium</em></a>.” The literal translation of this term is “living pledge.” Land would be temporarily pledged to the lender who used it to generate income to pay off the debt. Once the lender had collected enough income to cover the debt and some interest, the land would revert back to the borrower.</p>
<p>With the alternative, the “<a href="https://www.merriam-webster.com/dictionary/mortuum%20vadium"><em>Mortuum Vadium</em></a>” or “dead pledge,” land was pledged to the lender until the borrower could fully repay the debt. It was, essentially, an interest-only loan with full principal payment from the borrower required at a future date. When the lender demanded repayment, the borrower had to pay off the loan or lose the land. </p>
<p>Lenders would keep proceeds from the land, be it income from farming, selling timber or renting the property for housing. In effect, the land was <a href="https://www.jstor.org/stable/pdf/1321129.pdf">dead to the debtor</a> during the term of the loan because it provided no benefit to the borrower. </p>
<p>Following <a href="https://www.royal.uk/william-the-conqueror">William the Conqueror’s victory</a> at the Battle of Hastings in 1066, the English language was heavily influenced by <a href="https://blocs.mesvilaweb.cat/subirats/the-norman-conquest-the-influence-of-french-on-the-english-language-loans-and-calques/">Norman French</a> – William’s language.</p>
<p>That is how the Latin term “<em>Mortuum Vadium</em>” morphed into “<em>Mort Gage</em>,” Norman French for “dead” and “pledge.” “<a href="https://www.etymonline.com/word/mortgage">Mortgage</a>,” a <a href="https://ia600201.us.archive.org/1/items/cu31924021674399/cu31924021674399.pdf">mashup of the two words</a>, then entered the English vocabulary.</p>
<h2>Establishing rights of borrowers</h2>
<p>Unlike today’s mortgages, which are usually due within 15 or 30 years, English loans in the 11th-16th centuries were unpredictable. <a href="https://www.jstor.org/stable/pdf/1323192.pdf">Lenders could demand repayment</a> at any time. If borrowers couldn’t comply, lenders could seek a court order, and the land would be forfeited by the borrower to the lender. </p>
<p>Unhappy borrowers could <a href="https://www.law.cornell.edu/wex/chancery">petition the king</a> regarding their predicament. He could refer the case to the lord chancellor, who could <a href="https://www.britannica.com/topic/Chancery-Division">rule as he saw fit</a>. </p>
<p><a href="https://www.britannica.com/biography/Francis-Bacon-Viscount-Saint-Alban">Sir Francis Bacon</a>, England’s lord chancellor from 1618 to 1621, <a href="https://www.jstor.org/stable/752041">established</a> the <a href="https://www.law.cornell.edu/wex/equity_of_redemption">Equitable Right of Redemption</a>.</p>
<p>This new right allowed borrowers to pay off debts, even after default.</p>
<p>The official end of the period to redeem the property was called <a href="https://www.law.cornell.edu/wex/foreclosure">foreclosure</a>, which is derived from an Old French word that means “<a href="https://www.etymonline.com/word/foreclose">to shut out</a>.” Today, foreclosure is a legal process in which lenders to take possession of property used as collateral for a loan. </p>
<h2>Early US housing history</h2>
<p>The <a href="https://www.loc.gov/classroom-materials/united-states-history-primary-source-timeline/colonial-settlement-1600-1763/overview/">English colonization</a> of what’s now <a href="https://themayflowersociety.org/history/the-mayflower-compact/">the United States</a> didn’t immediately transplant mortgages across the pond. </p>
<p>But eventually, U.S. financial institutions were offering mortgages.</p>
<p><a href="https://www.huduser.gov/publications/pdf/us_evolution.pdf">Before 1930, they were small</a> – generally amounting to at most half of a home’s market value.</p>
<p>These loans were generally short-term, maturing in under 10 years, with payments due only twice a year. Borrowers either paid nothing toward the principal at all or made a few such payments before maturity.</p>
<p>Borrowers would have to refinance loans if they couldn’t pay them off.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Aerial view of a single-family home community" src="https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/492809/original/file-20221101-25187-ypftn1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mortgages make it easier for Americans to buy houses like these in Huntington Beach, Calif.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/aerial-view-of-single-family-homes-photographed-during-a-news-photo/1181102068?phrase=single-family%20house&adppopup=true">Jeff Gritchen/MediaNews Group/Orange County Register via Getty Images</a></span>
</figcaption>
</figure>
<h2>Rescuing the housing market</h2>
<p>Once America fell into the <a href="https://www.history.com/topics/great-depression">Great Depression</a>, the <a href="https://www.stlouisfed.org/news-releases/2008/05/02/does-the-great-depression-hold-the-answers-for-the-current-mortgage-distress">banking system collapsed</a>. </p>
<p>With most homeowners unable to pay off or refinance their mortgages, the <a href="https://www.federalreservehistory.org/essays/great-depression">housing market crumbled</a>. The number of <a href="https://www.encyclopedia.com/education/news-and-education-magazines/housing-1929-1941">foreclosures grew to over 1,000 per day by 1933</a>, and housing prices fell precipitously. </p>
<p>The <a href="https://www.fhfaoig.gov/Content/Files/History%20of%20the%20Government%20Sponsored%20Enterprises.pdf">federal government responded by establishing</a> new agencies to stabilize the housing market.</p>
<p>They included the <a href="https://www.hud.gov/program_offices/housing/fhahistory">Federal Housing Administration</a>. It provides <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-mortgage-insurance-and-how-does-it-work-en-1953/">mortgage insurance</a> – borrowers pay a small fee to protect lenders in the case of default. </p>
<p>Another new agency, the <a href="https://sf.freddiemac.com/articles/insights/why-americas-homebuyers-communities-rely-on-the-30-year-fixed-rate-mortgage">Home Owners’ Loan Corp.</a>, established in 1933, bought defaulted short-term, semiannual, interest-only mortgages and transformed them into new long-term loans lasting 15 years.</p>
<p>Payments were monthly and self-amortizing – covering both principal and interest. They were also fixed-rate, remaining steady for the life of the mortgage. Initially they skewed more heavily toward interest and later defrayed more principal. The corporation made new loans for three years, tending to them until it <a href="https://content.time.com/time/subscriber/article/0,33009,858135,00.html">closed in 1951</a>. It pioneered long-term mortgages in the U.S.</p>
<p>In 1938 Congress established the Federal National Mortgage Association, better known as <a href="https://www.fanniemae.com/about-us/who-we-are/history">Fannie Mae</a>. This <a href="https://www.financial-dictionary.info/terms/government-sponsored-enterprise/">government-sponsored enterprise</a> made fixed-rate long-term mortgage loans viable <a href="https://www.investopedia.com/terms/s/securitization.asp">through a process called securitization</a> – selling debt to investors and using the proceeds to purchase these long-term mortgage loans from banks. This process reduced risks for banks and encouraged long-term mortgage lending.</p>
<h2>Fixed- versus adjustable-rate mortgages</h2>
<p>After World War II, Congress authorized the Federal Housing Administration to insure <a href="https://www.govinfo.gov/content/pkg/CPRT-108HPRT92629/html/CPRT-108HPRT92629.htm">30-year loans on new construction</a> and, a few years later, purchases of existing homes. But then, the <a href="https://files.stlouisfed.org/files/htdocs/publications/review/69/09/Historical_Sep1969.pdf">credit crunch of 1966</a> and the years of high inflation that followed made adjustable-rate mortgages more popular.</p>
<p>Known as ARMs, these mortgages have stable rates for only a few years. Typically, the initial rate is significantly lower than it would be for 15- or 30-year fixed-rate mortgages. Once that initial period ends, <a href="https://www.investopedia.com/terms/a/arm.asp">interest rates on ARMs</a> get adjusted up or down annually – along with monthly payments to lenders. </p>
<p>Unlike the rest of the world, where ARMs prevail, Americans still prefer the <a href="https://sf.freddiemac.com/articles/insights/why-americas-homebuyers-communities-rely-on-the-30-year-fixed-rate-mortgage">30-year fixed-rate mortgage</a>.</p>
<p>About <a href="https://data.census.gov/cedsci/table?q=DP04&t=Housing">61% of American homeowners</a> have mortgages today – with <a href="https://doi.org/10.1080/15214842.2020.1757357">fixed rates the dominant type</a>.</p>
<p>But as interest rates rise, demand for <a href="https://www.corelogic.com/intelligence/interest-rates-are-up-but-arm-backed-home-purchases-are-way-up/">ARMs is growing</a> again. If the Federal Reserve fails to slow inflation and interest rates continue to climb, unfortunately for some ARM borrowers, the term “dead pledge” may live up to its name.</p><img src="https://counter.theconversation.com/content/193005/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael J. Highfield does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With 30-year fixed rates hitting a 20-year high of 7%, a finance scholar explains where these life-altering loans originated.Michael J. Highfield, Professor of Finance and Warren Chair of Real Estate Finance, Mississippi State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1923652022-10-14T12:49:53Z2022-10-14T12:49:53ZHow to understand what’s going on with UK mortgage rates<figure><img src="https://images.theconversation.com/files/489544/original/file-20221013-11-jvye0w.jpg?ixlib=rb-1.1.0&rect=52%2C0%2C6928%2C4657&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">"Mortgage approved": an increasingly unlikely outcome in the current environment.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/approved-mortgage-loan-agreement-application-1397767763">Fabio Balbi / Shutterstock</a></span></figcaption></figure><p>The UK mortgage market has tightened as confidence in the economy has faltered in recent weeks. Lenders withdrew more than <a href="https://www.ft.com/content/d9a62b84-4a51-40d6-9002-a1310ce3c8dc">1,600 homeloan products</a> after the (then) chancellor Kwasi Kwarteng’s September mini-budget sent the UK economy into a <a href="https://www.theguardian.com/uk-news/2022/sep/30/how-kwasi-kwarteng-mini-budget-hit-uk-economy-in-numbers">tailspin</a>. </p>
<p>Rates on the mortgage products that are still available have risen to record levels – average two-year and five-year fixed rates have now <a href="https://moneyfacts.co.uk/news/mortgages/best-uk-residential-mortgage-rates-this-week/">passed 6%</a> for the first time since 2008 and 2010 respectively.</p>
<p>The Bank of England has intervened to try to <a href="https://inews.co.uk/news/bank-england-intervenes-uk-government-bond-market-1904744">calm the situation</a>. But this help currently has an <a href="https://www.theguardian.com/business/2022/oct/12/bond-buying-programme-will-end-on-friday-insists-bank-of-england">end date</a> of Friday 14 October, after which it’s unclear what will happen in the financial markets that influence people’s mortgage rates. </p>
<p>This is a crucial issue for a lot of people: <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/researchoutputssubnationaldwellingstockbytenureestimatesengland2012to2015/2020">28% of all dwellings</a> are owned with a loan, with mortgage payments eating up about <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/housepriceindexannualtables2039">a sixth of household income</a>, on average.</p>
<p>Looking at how the market has developed over time can help to explain how we got here and where we are going – which is basically headfirst into a period of high interest rates, low loan approvals and plateauing house prices.</p>
<p>All financial markets are driven by information, confidence and cash. Investors absorb new information which feeds confidence or drives uncertainty, and then they choose how to invest money. As the economy falters, confidence erodes and the interest rates that banks must pay to access funding in financial markets – which influence mortgage rates for borrowers – become unpredictable. </p>
<p>Banks do not like such uncertainty and they do not like people defaulting on their loans. Rising interest rates and uncertainty increase their risk, reduce the volume of mortgage sales and place downward pressure on their profits.</p>
<h2>How banks think about risk</h2>
<p>Once you understand this, predicting bank behaviour in the mortgage market becomes a lot easier. Take the period before the global financial crisis of 2008 as an example. In the early 1990s, controls over mortgage lending were relaxed so that, by the early 2000s, mortgage product innovation was a firm trend. </p>
<p>This led to mortgages being offered for 125% of a property’s value, and banks lending people four times their annual salary (or more) to buy a home and allowing self-employed borrowers to “self-certify” their incomes.</p>
<p>The risks were low at this time for two reasons. First, as mortgage criteria became more liberal, it brought more money into the market. This additional money was chasing the same supply of houses, which increased house prices. In this environment, even if people defaulted, banks could easily sell on repossessed houses and so default risks were less of a concern. </p>
<p>Second, banks began to offload their mortgages into the financial markets at this time, passing on the risk of default to investors. This freed up more money for them to lend out as mortgages.</p>
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Read more:
<a href="https://theconversation.com/how-bonds-work-and-why-everyone-is-talking-about-them-right-now-a-finance-expert-explains-191550">How bonds work and why everyone is talking about them right now: a finance expert explains</a>
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<p>The Bank of England’s base rate also <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">dropped throughout this period</a> from a high of 7.5% in June 1998 to a low of 3.5% in July 2003. People desired housing, mortgage products were many and varied, and house prices were rising – <a href="https://www.researchgate.net/publication/227429691_The_Sub-Prime_Crisis_the_Credit_Squeeze_and_Northern_Rock_The_Lessons_to_Be_Learned">perfect conditions</a> for a booming housing market. Until, of course, the global financial crisis hit in 2008.</p>
<p>The authorities reacted to the financial crisis by firming up the mortgage rules and going back to basics. This meant increasing the capital – or protection – that banks had to hold against the mortgages they had on their books, and <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2706485">strengthening the rules</a> around mortgage products. In essence: goodbye self-certification and 125% loans, hello lower income multiples and bulked-up bank balance sheets.</p>
<p>The upshot of these changes was fewer people could qualify to borrow to buy a home, so average UK house prices dropped from more than £188,000 in July 2007 to around £157,000 in January 2009. The damage was so deep that they had only partially recovered some of these losses to reach £167,000 by January 2013.</p>
<p><strong>Average UK house price, Jan 2005-July 2022:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing average UK house prices between January 2005 and July 2022." src="https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=236&fit=crop&dpr=1 600w, https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=236&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=236&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=297&fit=crop&dpr=1 754w, https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=297&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/489557/original/file-20221013-23-4hzst5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=297&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/july2022">HM Land Registry, Registers of Scotland, Land and Property Services Northern Ireland, Office for National Statistics – UK House Price Index</a></span>
</figcaption>
</figure>
<h2>New constraints</h2>
<p>Of course, prices have boomed again more recently. This is partly because banks had slowly <a href="https://www.unbiased.co.uk/news/mortgages/its-back-the-return-of-the-100-mortgage">started to relax</a>, although with less flexibility and more regulation than before the global financial crisis. This reduction in flexibility cut product choice, but low interest rates and low monthly payments have encouraged individuals to take on more debt and banks to grant more mortgages.</p>
<p>Availability of loans fuels house prices so the cycle starts again, although within a more regulated market this time. But the result has been largely the same: average house prices have risen to <a href="https://www.theguardian.com/business/2022/oct/07/fear-panic-housing-market-bishops-stortford-mini-budget-mortgages#:%7E:text=The%20average%20UK%20house%20price%20is%20now%20%C2%A3293%2C835">just shy of £300,000</a> and the total value of <a href="https://www.statista.com/statistics/428498/gross-mortgage-lending-united-kingdom/">gross mortgage lending</a> in the UK has grown from £148 billion in 2009 to £316 billion by 2021.</p>
<p>But when new information hit the markets – starting with Russia’s invasion of Ukraine earlier this year – everything changed and confidence tanked. The resulting supply-side constraints and spiking fuel prices have stoked inflation. And the <a href="https://www.imf.org/en/Blogs/Articles/2022/08/10/central-banks-hike-interest-rates-in-sync-to-tame-inflation-pressures">very predictable</a> response of the Bank of England has been to increase interest rates.</p>
<p>Why? Because increasing interest rates is supposed to stop people spending and encourage them to save instead, taking the heat out of the economy. However, this rise in interest rates, and therefore <a href="https://www.mortgagesolutions.co.uk/news/2022/10/05/monthly-average-mortgage-payments-to-rise-300/">monthly mortgage payments</a>, is happening at a time when people’s disposable income is already being <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/articles/energypricesandtheireffectonhouseholds/2022-02-01">drastically reduced</a> by rising fuel prices.</p>
<figure class="align-center ">
<img alt="Man reading newspaper headlines about mortgages." src="https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/489733/original/file-20221014-25-vph4v5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Recent political and economic events have tightened many people’s budgets as mortgage rates have risen significantly.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/man-reading-mortgage-headlined-newspaper-558116308">garagestock / Shutterstock</a></span>
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</figure>
<h2>Mortgage market outlook</h2>
<p>So what of the mortgage markets going forward? The present economic situation, while completely different from that of the 2008 financial crisis, is borne of the same factor: confidence. The political and economic environment – the policies of the <a href="https://news.sky.com/story/mini-budget-why-financial-markets-have-been-spooked-by-chancellors-growth-plan-12703889">Truss administration</a>, Brexit, the war in Ukraine, rising fuel costs and inflation – has shredded investor confidence and increased risk for banks.</p>
<p>In this environment, banks will continue to protect themselves by tightening product ranges while increasing mortgage rates, deposit sizes (or loan-to-values) and the admin fees they charge. Loan approvals are already <a href="https://www.ey.com/en_uk/news/2022/09/uk-mortgage-lending-set-to-fall-in-october-ey-item-club-comments">falling</a> and cheap mortgages have rapidly disappeared. </p>
<p><a href="https://www.reuters.com/markets/europe/uk-house-price-growth-slows-weakest-since-july-2020-rics-2022-10-12/#:%7E:text=Enquiries%20by%20new%20buyers">Demand for homeloans</a> will also keeping falling as would-be borrowers are faced with a reduced product range as well as rising loan costs and monthly payments. Few people make big financial decisions when uncertainty is so high and confidence in the government is so low. </p>
<p>Optimistically, the current situation will cause UK house prices to plateau, but given the <a href="https://www.theguardian.com/business/live/2022/oct/14/kwasi-kwarteng-returns-early-imf-markets-price-more-u-turns-business-live">continued uncertainty</a> arising from government policy, it’s realistic to expect falls in certain areas as financial market volatility continues.</p><img src="https://counter.theconversation.com/content/192365/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert Webb does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Borrowers want to know when soaring mortgage rates will go down again.Robert Webb, Professor of Banking & Applied Economics, University of StirlingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1918162022-10-07T15:01:29Z2022-10-07T15:01:29ZInflation: why you might be worrying about it more than you should<figure><img src="https://images.theconversation.com/files/488780/original/file-20221007-14-tvb5yg.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A strange thing happens when we think about prices. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/family-debts-young-frustrated-desperate-woman-705340318">Zwiebackesser</a></span></figcaption></figure><p>People <em>really</em> dislike inflation. Today, with <a href="https://www.bls.gov/news.release/cpi.nr0.htm">US annual inflation</a> still above 8%, <a href="https://news.gallup.com/poll/1675/most-important-problem.aspx">one in five Americans</a> consider it the country’s biggest problem – <a href="https://uk.news.yahoo.com/poll-midterm-momentum-shifts-back-to-gop-as-inflation-fears-grow-151344613.html">spelling trouble</a> for the Democrats at the November mid-terms.</p>
<p>Inflation is also the <a href="https://europeansting.com/2022/07/11/inflation-is-the-worlds-biggest-worry-according-to-a-new-poll/">top concern</a> for voters around the world, while in the UK, the <a href="https://www.independent.co.uk/news/uk/politics/government-inflation-under-tax-cuts-poll-b2140490.html">public wanted</a> the government to deal with it before thinking about tax cuts (but the government had other ideas). </p>
<p>From the <a href="https://www.britannica.com/event/Arab-Spring">Arab spring</a> to the recent <a href="https://www.crisisgroup.org/europe-central-asia/central-asia/kazakhstan/behind-unrest-kazakhstan">Kazakh unrest</a>, price rises often lead to mass discontent. There’s even a word for fear of prices – timophobia – and there’s plenty of it in Europe at present. Scarcely had this autumn started than <a href="https://www.theguardian.com/world/2022/sep/04/czech-republic-prague-protest-sanctions-energy-crisis-gas-russia">70,000 people gathered</a> in Prague to protest energy hikes, blaming the EU and Nato. Anti-European populism has triumphed in the <a href="https://theconversation.com/giorgia-melonis-win-in-italy-proves-even-a-seemingly-successful-government-can-fall-victim-to-populism-191278">Italian election</a>, with the far-right often using the energy crisis to attack the establishment. </p>
<p>Yet this discontent is at least in part the result of misconceptions. People tend to misperceive inflation as higher than it actually is, which stokes the potential for unrest. Economic research suggests this misperception is particularly common when the prices of everyday items are rising fastest, as they are today. So what explains this, and what can we do about it?</p>
<h2>How inflation works</h2>
<p>During the COVID lockdowns of 2020-21, consumer spending <a href="https://www.macrotrends.net/countries/WLD/world/consumer-spending">fell drastically</a>. Prices stagnated and in some countries even declined. But after the worst was over, consumer spending returned with a vengeance, creating supply shortages. Together with huge cash handouts in numerous countries to support people and businesses, and the effect of the Ukraine war on energy supplies, this is why inflation is resurgent for the first time in decades. </p>
<p>Economists are still investigating the persistence of this surge, but nobody expects records to be broken. While it is unquestionably hurting citizens, bankruptcies are unlikely for the most part. So why are people so worried?</p>
<p>It’s important to realise how economists measure inflation. They cost the typical basket of goods that a normal household would buy over a year, and compare it with the previous year. Some goods recur much more than others: for example, households typically buy many eggs each year but not many cars. If, though, a person buys a car worth £10,000 every ten years, economists assign a tenth of that outlay to the annual shopping basket – in other words, £1,000. </p>
<p>So despite appearing in larger quantities in the annual basket, everyday items affect inflation much less. You might buy milk worth £1 every other day, but this counts for less than, say, a mobile phone worth £1,000 bought every two years: £182 for the milk v £500 for the phone. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Woman with a shopping basket holding up a bottle of milk" src="https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488519/original/file-20221006-24-cwqxs6.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Items like milk are less important to inflation than most people think.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/woman-buying-milk-supermarket-1981461779">Pixel-Shot</a></span>
</figcaption>
</figure>
<p>For this reason, economists (and central banks) worry less about the price of goods like milk, petrol or tomatoes than about big-ticket items. And increases in the prices of everyday items are often balanced out by drops in things like televisions or computers. </p>
<h2>Consumer perceptions</h2>
<p>In contrast, when the average citizen sees prices of everyday items rising, they assume it represents a general rise in living costs. <a href="https://ideas.repec.org/a/onb/oenbmp/y2005i3b2.html">For example</a>, when the euro was introduced, merchants tended to round up when translating prices from the old currencies. Shoppers would see milk climbing from, say, €0.90 equivalent to €1 in euros, and it felt like inflation was running at 11%. </p>
<p>But many overlooked the fact that TV sets only rose from, say, €499.50 to €500, which was just a 0.1% rise. Contrary to what people thought, overall eurozone inflation remained low. </p>
<p>To see if this idea would hold under proper research conditions, two colleagues and I designed and ran <a href="https://www.sciencedirect.com/science/article/abs/pii/S0014292114000221?via%3Dihub">a novel experiment</a> a few years ago. We invited 186 people to a computer lab, endowed them with a budget and asked them to buy a basket of virtual goods, over a number of imaginary years. We then asked them what the inflation rate was, and rewarded them in real US dollars for the accuracy of their estimations. </p>
<p>Our participants generally estimated well. However, in setups where they had to buy cheap goods frequently and the prices rose fast, they overestimated total inflation significantly. Equally, when the prices of such goods fell, they underestimated significantly. This showed conclusively that bias around frequent purchases leads to inflation misperception. </p>
<h2>What this means today</h2>
<p>How does this relate to the present, when prices really have been going up sharply? The same thing almost certainly applies, because frequently purchased goods have been rising especially fast. Take an everyday staple like your morning latte. <a href="https://www.reuters.com/markets/commodities/almost-luxury-eu-coffee-prices-up-169-august-2022-10-06/">In the EU</a>, the price of coffee rose more than 15% in the year to August, milk more than 20% and sugar more than 30% – all way ahead of the 9% overall inflation level. </p>
<p>It’s similar across the board. Eurozone energy prices rose 30% in September year on year, and food, alcohol and tobacco more than 10%. Meanwhile, services and non-energy industrial goods rose only about 5%.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing the difference between inflation in everyday items and overall" src="https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=324&fit=crop&dpr=1 600w, https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=324&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=324&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=407&fit=crop&dpr=1 754w, https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=407&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/488753/original/file-20221007-14-hp8xvj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=407&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area">Eurostat</a></span>
</figcaption>
</figure>
<p>This helps to explain the heavy pressure for salary rises and votes to strike, even though goods going up fastest in price are often a relatively small part of people’s budgets. Even for the poorest households, for whom inflation is a bigger issue, energy bills only represent <a href="https://www.economist.com/britain/2022/04/21/a-guide-to-britains-cost-of-living-crunch">about 15%</a> of their total spending. </p>
<p>Such misperceptions can hurt government popularity deeply. No wonder nations are responding with expensive and possibly harmful subsidies that still might not suffice. Populist leaders who have been elected by appealing to voters’ biases more than reason are likely to be especially vulnerable. </p>
<p>Inflation misperception also puts more pressure on central banks to raise interest rates to tackle inflation. Yet raising rates will only help with inflation driven by the demand side (government handouts) as opposed to by the supply side (global logistics, Russia), so it’s hard to know how effective this will be. Since the rate rises affect the cost of mortgages and other lending, they may do more harm than good. </p>
<p>This all highlights the need for people to be better educated about inflation. Clearly the media has an important role here, though these are deep-rooted biases that will be difficult to shift in the short term. The spectre of civil unrest is therefore likely to haunt the northern hemisphere in the months ahead, even though such protests are not entirely based on reality.</p><img src="https://counter.theconversation.com/content/191816/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sotiris Georganas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When we look at certain prices, we jump to conclusions about inflation rates that are not accurate.Sotiris Georganas, Reader in Behavioural Economics, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1914602022-09-30T10:41:31Z2022-09-30T10:41:31ZHouse prices: why a fall isn’t certain and wouldn’t help first-time buyers much anyway<figure><img src="https://images.theconversation.com/files/487563/original/file-20220930-22-4p9htq.jpg?ixlib=rb-1.1.0&rect=24%2C0%2C5439%2C3637&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Rise and fall?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/row-typical-english-terraced-houses-west-642382696">Shutterstock/I Wei Huang</a></span></figcaption></figure><p>The UK remains a nation of homeowners, with two-thirds of all dwellings <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/datasets/dwellingstockbytenureuk">belonging</a> to the people who live in them. But as interest rates swiftly rise, there are fears that many of those households will soon find their mortgage payments unaffordable. </p>
<p>As <a href="https://www.bbc.co.uk/news/live/business-63069137">one BBC interviewer told</a> the new prime minister: “People were worried whether they could heat their homes. They’re now worried whether they can keep their homes.”</p>
<p>More expensive mortgages could certainly depress the housing market, with serious effects on the wider economy. This is why governments generally try to keep house prices rising, even as they attempt to restrict inflation elsewhere. But even under these more difficult economic conditions, it’s by no means certain that house prices will actually come down significantly.</p>
<p>A buoyant housing market can <a href="https://www.bankofengland.co.uk/knowledgebank/how-does-the-housing-market-affect-the-economy">boost the overall economy</a>, because homeowner confidence leads to increased spending. Homes are also an important way of <a href="https://bankunderground.co.uk/2018/05/25/home-grown-financing-how-small-business-owners-use-their-own-houses-to-support-investment/">securing loans</a> for small business investment. </p>
<p>For more than a decade, until 2021, the Bank of England helped promote mortgage affordability with <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">historically low</a> interest rates. And while households took on more mortgage debt over this period, the cost of repaying that debt <a href="https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2021/december-2021.pdf">kept falling</a> as a proportion of income. </p>
<p>As people took advantage of these low borrowing costs, a million more homes <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1060141/2020-21_EHS_Headline_Report_revised.pdf">became owner-occupied</a> between 2015 and 2020. Thousands more used cheap buy-to-let mortgages to <a href="https://www.landlordzone.co.uk/news/britains-buy-to-let-boom-not-over-yet/">acquire additional properties</a> to supplement their work or pension income. </p>
<p>The sudden rise in costs of mortgage debt, in relation to borrowers’ income, now makes their situation <a href="https://twitter.com/i/status/1574833752483586048">unexpectedly precarious</a>, even though interest rates are still much lower than they were before 2008.</p>
<h2>Rental disagreement</h2>
<p>For those still striving to get onto the property ladder, the problems may seem even starker. Rising house prices are no match for average incomes which haven’t risen <a href="https://fullfact.org/economy/how-have-wages-changed/">much in real terms</a> since 2008.</p>
<p>The mini-boom in home ownership from 2015 to 2020 also tended to stifle political debate about renters who couldn’t afford to get on the property ladder, even though rising house prices have been <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/indexofprivatehousingrentalprices/august2022">driving up rent costs</a>. </p>
<p>Meanwhile, for some younger people, there has been financial help in progressing from renting to buying from the ever-growing “bank of mum and dad”, estimated to be worth <a href="https://www.savills.co.uk/insight-and-opinion/savills-news/331423/bank-of-mum-and-dad-to-lend-a-total-%C2%A325-billion-to-their-children-over-the-next-three-years">£25 billion in gifts</a> and loans from 2022 to 2024. But better-off households giving their children a lift onto the ladder has contributed to the UK’s <a href="https://www.theguardian.com/commentisfree/2017/may/03/blame-bank-mum-dad-britain-inequality-capitalism">rising wealth inequality</a>.</p>
<p>And although successive governments have pledged to make housing more affordable by <a href="https://www.homebuilding.co.uk/news/planning-reforms">relaxing planning laws</a> to accelerate new building, their main solution has actually been to offer more help with the buying. The Conservatives’ help-to-buy schemes <a href="https://england.shelter.org.uk/professional_resources/policy_and_research/policy_library/research_how_much_help_is_help_to_buy">channelled up to £6 billion</a> in this direction. Recent <a href="https://www.gov.uk/government/publications/the-growth-plan-2022-factsheet-on-stamp-duty-land-tax">cuts to stamp duty</a> were intended to give a further boost.</p>
<p>This delicate balancing of interests – allowing homes to become more expensive while ensuring that first-time buyers can still afford them – is tricky at the best of times. It is even harder to achieve after the turbulent reception for the new UK government’s <a href="https://theconversation.com/mini-budget-2022-experts-react-to-the-new-uk-governments-spending-and-tax-cut-plans-191274">recent mini-budget</a>. </p>
<p>Interest rates had already <a href="https://www.icaew.com/insights/viewpoints-on-the-news/2022/aug-2022/bank-of-england-raises-interest-rates-and-predicts-uk-recession">risen sharply</a> since the start of 2022 as the Bank of England reacted to inflation reaching 9.9% and the <a href="https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising">projection that it will peak</a> at 11% – far above the Bank’s 2% target. </p>
<p>The Bank may now have to raise its base interest rate by much more than September’s <a href="https://www.bbc.co.uk/news/business-57764601">rise to 2.25%</a> – already the highest since 2008 – to stop financial markets resuming their <a href="https://theconversation.com/sterling-hits-all-time-low-two-things-can-turn-this-around-but-neither-is-straightforward-191370">sell-off of the pound</a>, which has already nudged inflation forecasts upwards. </p>
<p>The likely result is that new mortgages will be significantly more expensive, and harder to obtain without a larger deposit. Existing mortgages will become costlier to service for those who didn’t manage to fix a low rate before credit markets were <a href="https://www.estateagenttoday.co.uk/breaking-news/2022/9/mortgage-chaos-leaves-first-time-buyers-high-and-dry-claims-property-expert?source=newsticker">thrown into turmoil</a>. </p>
<h2>Hazards of a house price fall</h2>
<p>The loan affordability shock is likely to deepen <a href="https://theconversation.com/is-the-uk-in-a-recession-how-central-banks-decide-and-why-its-so-hard-to-call-it-191237?utm_medium=email&utm_campaign=Latest%20from%20The%20Conversation%20for%20September%2027%202022%20-%202415024131&utm_content=Latest%20from%20The%20Conversation%20for%20September%2027%202022%20-%202415024131+CID_fb67fe7c4059e0eaa4852bc8f9b5f0f4&utm_source=campaign_monitor_uk&utm_term=Is%20the%20UK%20in%20a%20recession%20How%20central%20banks%20decide%20and%20why%20its%20so%20hard%20to%20call%20it">a recession</a> that was <a href="https://ihsmarkit.com/research-analysis/uk-recession-risks-rise-as-flash-pmi-surveys-signal-deepening-downturn-sep22.html">already on the way</a>, due to the squeeze on household spending from the cost-of-living increase.</p>
<p>But this does not necessarily mean house prices will drop, as fears of mortgage costs and withdrawal of cheap mortgage offers could significantly reduce demand. Higher interest rates and reduced confidence have already <a href="https://www.housingtoday.co.uk/news/housebuilding-activity-falls-for-first-time-in-two-years/5118269.article">slowed house-building</a> activity. </p>
<figure class="align-center ">
<img alt="Jumbled pile of green toy houses." src="https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C4961%2C2339&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=356&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=356&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487351/original/file-20220929-24-jwwcf4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=356&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tumbling down?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/toy-houses-pile-93874366">Shutterstock/GrandeDuc</a></span>
</figcaption>
</figure>
<p>The weaker pound will also make UK property, especially in large cities, more attractive to foreign buyers. The <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/articles/researchoutputssubnationaldwellingstockbytenureestimatesengland2012to2015/2020">mortgage-free households</a> that account for 45% of England’s 15 million owner-occupied homes (and 36% of the total) may also be tempted to buy more property. </p>
<p>But if house prices do drop sharply, as some <a href="https://www.theguardian.com/money/2022/sep/28/uk-house-prices-predicted-fall-mortgage-interest-rate">forecasts now suggest</a>, it could spark a downward spiral. Struggling mortgage-holders would be forced to sell, overloading supply and pushing more borrowers into negative equity. </p>
<p>If houses do get substantially cheaper, first-time buyers will continue to struggle as borrowing for them too will become significantly more expensive. For a falling property ladder to come within their reach would require a downturn of extreme severity, leaving few people feeling secure.</p><img src="https://counter.theconversation.com/content/191460/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A deepening recession risk will keep home ownership out of reach for many.Alan Shipman, Senior Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1911682022-09-29T19:39:36Z2022-09-29T19:39:36ZIslamic finance provides an alternative to debt-based systems<figure><img src="https://images.theconversation.com/files/486401/original/file-20220925-56614-ux1ea3.jpg?ixlib=rb-1.1.0&rect=0%2C98%2C6000%2C3889&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The growth of Islamic banks provides Muslims living in North America with options that reflect their beliefs.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>For years, Muslims in North America have struggled to find ways to purchase homes while complying with Islamic law, or shariah. The Qur'an prohibits both the collection and payment of interest. For more than a million Canadians, <a href="https://www.theglobeandmail.com/business/article-muslim-homebuyers-flock-to-halal-financing-options-as-new-companies/">these religious structures limited access to conventional mortgages</a>.</p>
<p>Recently, however, companies such as the <a href="https://www.halalfinancialcorp.com/">Canadian Halal Financial Corporation</a> have emerged to fill this void. The creation of a vehicle in North America to enable Muslims to finance home ownership is part of an emerging global movement in finance.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/OvnF2f2MZug?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The International Monetary Fund explains Islamic finance.</span></figcaption>
</figure>
<p>I spent over a year documenting <a href="https://press.uchicago.edu/ucp/books/book/chicago/B/bo29124010.html">one centre of this global movement in Malaysia</a>. There, the government has sought to create an Islamic Wall Street. It seeks to make the country’s capital, Kuala Lumpur, what one official called the “New York of the Muslim world.” </p>
<p>I am continuing my research on Islamic finance at the <a href="https://ccl.uvic.ca">Counter Currency Laboratory</a> at the University of Victoria, where we study emerging debates on the future of money.</p>
<h2>A network of Islamic banks</h2>
<p>The <a href="https://www.bnm.gov.my/islamic-banking-takaful">Central Bank of Malaysia has engineered</a> a comprehensive Islamic financial system consisting of a network of banking institutions. They have also fostered an Islamic money market, Islamic capital markets and an Islamic insurance, or takaful, system.</p>
<p>Across the country, institutions such as Bank Muamalat, HSBC Amanah and Standard Charter Saadiq, have readily sought to develop this market. Today, Islamic financial institutions aggressively promote shariah-compliant credit cards, home loans, and insurance policies. The government has also sought to spur innovation by opening its borders to competition from Islamic financial institutions based in the Arabian Gulf region.</p>
<p>On the streets of Kuala Lumpur, the ubiquity of Islamic banking and finance in the country was hard to miss. Bright advertisements offered consumers credit cards that provided “<a href="https://doi.org/10.1007/978-3-030-59840-2">free takaful coverage, low fees, and no compounding finance charges</a>.”</p>
<p>Inside Kuala Lumpur’s massive ultramodern train station, eye-catching advertisements promoted Islamic finance. <a href="https://www.alrajhibank.com.sa/en">Al-Rajhi Bank</a>, a Saudi firm that bills itself as the world’s largest Islamic bank, encouraged potential customers to “Get There Fast” with “Al Rahji Personal Financing.” On the other side of the station, the mainly Qatari-held <a href="https://www.mbsbbank.com/">Asian Finance Bank</a> boldly proclaimed that it was “moving the world to Islamic banking.”</p>
<p>Malaysian currency is readily available at the numerous ATMs owned by one of the over 20 Islamic banks operating in the country. Long lines often snaked back from the terminals during peak shopping times. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="customers line up in front of bank machines" src="https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">During peak shopping times, queues at ATMs can be quite long.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Shariah contracts</h2>
<p>The growth of Islamic finance has spurred a compelling intellectual and practical problem. As one Islamic finance professional in Malaysia relayed it to me: “What, exactly, is the ‘Islamic’ in Islamic finance?”</p>
<p>This raises the question of what is entailed in the Islamic prohibition against interest.</p>
<p>Two distinct techniques have been developed to avoid the payment of interest. One interlocutor described these options as either “shariah-compliant” or “shariah-based.”</p>
<h2>Mortgage alternatives</h2>
<p>A shariah-compliant contract, such as a murabaha, uses the sale and repurchase of an asset on a deferred-payment basis. </p>
<p>There are various ways a murabaha can be structured. In Malaysia, the type of murabaha commonly used as a substitute for a mortgage involved four steps. First, the customer identified a property that they would like to own. Second, the financial institution purchased the property from the current owner. </p>
<p>Third, the institution sold the property to the customer at a markup, with repayment scheduled on an instalment basis. Finally, the customer paid the required instalments on a periodic basis until all agreed upon payments are complete. </p>
<p>These contracts circumvent the Qur’anic prohibition on charging interest by having two distinct sales. The institution buys the property from the current owner and then immediately sells it at a markup to the customer. </p>
<p>Many bankers prefer shariah-compliant contracts — such as the murabaha — because they use a workaround to replicate a conventional loan contract. All of the infrastructure already held by a bank, such as the computer systems and back office process, can be easily adapted to this type of arrangement.</p>
<p>However, the rate of the markup on this contract closely tracked prevailing interest rates. Many experts in Malaysia were critical of this contract. They thought that, while it met the letter of Islamic law, it did not conform to its spirit.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="a man walks in front of a bank with a yellow sign that reads MAYBANK ISLAMIC" src="https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Maybank Islamic Bank is one of Malaysia’s largest Islamic financial institutions.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Sharing profits</h2>
<p>Critics and reformers favour a second technique for enabling financing, which they contend is “shariah-based.” This technique is premised on partnership principles and is called a musharakah. </p>
<p>This type of joint venture contract was commonly used on the Arabian peninsula even prior to the revelation of Islam. <a href="https://press.princeton.edu/books/ebook/9781400820474/partnership-and-profit-in-medieval-islam">It became a standard economic arrangement in the classical Islamic world</a>. </p>
<p>A musharakah is a profit-sharing contract in which two or more parties agree to pool their assets and labour for the purpose of making a profit. </p>
<p>In Malaysia, Islamic finance experts developed what they called a “<a href="https://doi.org/10.18646/2056.41.17-003">diminishing musharakah</a>.” In this contract, the financial institution and the homeowner would jointly purchase a home together. Over time, the homeowner progressively buys out the equity held by the financial institution by paying a monthly instalment. </p>
<p>In addition to the equity portion, the instalment also consisted of a profit margin. The profit margin was indexed to the prices of rent for comparable homes in the adjacent neighbourhood.</p>
<h2>What kind of alternative?</h2>
<p>Those seeking to reform Islamic finance favoured shariah-based contracts. They viewed them as a more authentic alternative to the shariah-compliant contracts.</p>
<p>Questions regarding the legitimacy of shariah-based and shariah-compliant contracts illustrate the vibrant debates that lie at the heart of Islamic finance. Which option Muslim consumers ultimately choose will determine the extent to which Islamic finance becomes an alternative to the debt-based system that prevails in most of the world today.</p><img src="https://counter.theconversation.com/content/191168/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daromir Rudnyckyj receives funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p>Shariah law informs financial contracts and credit systems, and the growth of Islamic financing options provides an alternative to current debt-based banking systems.Daromir Rudnyckyj, Professor, Anthropology, University of VictoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1888172022-08-31T01:54:14Z2022-08-31T01:54:14ZI’m considering an interest-only home loan. What do I need to know?<figure><img src="https://images.theconversation.com/files/480308/original/file-20220822-54947-qmv2tv.jpg?ixlib=rb-1.1.0&rect=0%2C29%2C3992%2C2958&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Chuttersnap/Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>An <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans">interest-only home loan</a>, as the name suggests, is where you only pay the interest on a loan and not the principal (the original amount you borrowed).</p>
<p>While authorities such as the Reserve Bank often <a href="https://www.rba.gov.au/speeches/2018/sp-ag-2018-04-24.html">see</a> them as risky, interest-only loans can be helpful in some circumstances.</p>
<p>If you’re considering an interest-only loan, here’s what you need to know.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/more-rented-more-mortgaged-less-owned-what-the-census-tells-us-about-housing-185893">More rented, more mortgaged, less owned: what the census tells us about housing</a>
</strong>
</em>
</p>
<hr>
<h2>How long do they go for?</h2>
<p>These loans are typically last for five years at most, before reverting back to principal and interest (where you have to pay back, through regular payments, both interest and the initial sum you borrowed).</p>
<p>You could potentially apply for another interest-only loan after your first one winds up, perhaps by refinancing (where you take a new mortgage to repay an existing loan). But you might not get it – and you’d still have to pay off the principal eventually.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480309/original/file-20220822-18038-nyikjs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Interest-only loans can cost you a lot more in interest over time than a regular principal and interest loan.</span>
<span class="attribution"><span class="source">Photo by Andrew Mead on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What are the upsides of an interest-only loan?</h2>
<p>An interest-only loan means you’ll have more cash available to cover other costs, or invest elsewhere.</p>
<p>You can use a <a href="https://moneysmart.gov.au/home-loans/mortgage-calculator">mortgage calculator</a> to work out how much extra cash you’d have if you switched from a principal and interest loan to an interest-only loan. It’s typically hundreds of dollars per week. </p>
<p>This may get you a bit more wriggle room for daily expenses. Or, some people use the extra cash to invest in other things – such as shares – in the hope they can make more money overall and pick up some tax benefits along the way. That’s why interest-only loans are often popular among <a href="https://moneysmart.gov.au/home-loans/interest-only-home-loans">investors</a>. Of course, this strategy comes with risk. </p>
<p>An interest-only loan may also have a redraw facility, allowing you to add extra payments into the loan (above and beyond the interest) if you want, and withdraw money later when you need cash. This can allow people to avoid a personal loan, which usually has a much higher interest rate.</p>
<p>Regular principal and interest loans may also have a redraw facility but the regular payments of principal are unavailable for redraw. That means less flexibility for the borrower. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480311/original/file-20220822-64666-y67vz3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">What’s right for one borrower won’t be for the next.</span>
<span class="attribution"><span class="source">Image by Pfüderi from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What are the downsides?</h2>
<p>The interest rates on interest-only loans are generally higher than principal and interest loans.</p>
<p>For example, the RBA July 2022 <a href="https://www.rba.gov.au/statistics/tables/xls/f05hist.xls">indicator rate</a> for owner-occupier interest-only rates is 6.31%.</p>
<p>But the equivalent variable rate for principal and interest loans is 5.77% (the indicator rate is just a guide; the actual difference varies from bank to bank).</p>
<p>Interest-only loans can cost you a lot more over time than a regular principal and interest loan.</p>
<p>This means a borrower needs to manage their finances well to ensure they can cover the interest payments now and still have enough to pay down the principal eventually. So you’ll need a plan for how you’re going to do that when the interest-only loan ends.</p>
<p>There is also a risk of a shock – such as job loss, personal crisis or housing crash – causing the borrower to default on the loan altogether. </p>
<p>If the borrower defaults on an interest-only loan, they may lose the house and the bank is left with a debt that was not substantially repaid (because the borrower had not yet made a dent in the principal). It’s a lose-lose situation.</p>
<h2>Are interest-only loans common?</h2>
<p>Interest-only loans represent <a href="https://www.apra.gov.au/news-and-publications/apra-releases-quarterly-authorised-deposit-taking-institution-statistics-11">11.3% of all home loans</a> in Australia.</p>
<p>This figure has been <a href="https://www.rba.gov.au/publications/fsr/2017/apr/box-b.html">trending down</a> over the past five years, due in part to tighter <a href="https://www.apra.gov.au/news-and-publications/apra-to-remove-interest-only-benchmark-for-residential-mortgage-lending">lending restrictions</a> and the fact low interest rates have made principal and interest loans relatively cheap recently.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=501&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=501&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480312/original/file-20220822-65738-za6ht2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=501&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Interest-only loans represent 11.3% of all home loans in Australia.</span>
<span class="attribution"><span class="source">Image by sandid from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What does the research say?</h2>
<p>One Dutch <a href="https://link.springer.com/article/10.1007/s11146-013-9453-9">study</a> found “households that are more risk-averse and less literate are significantly less likely to choose an interest-only mortgage”. This partly due to lower initial repayments and wealthy households preferring the financial flexibility.</p>
<p>Interest-only borrowing has also been found to <a href="https://www.sciencedirect.com/journal/journal-of-housing-economics">fuel</a> <a href="https://doi.org/10.1016/j.regsciurbeco.2018.06.004">housing</a> <a href="https://www.sciencedirect.com/science/article/pii/S1094202520300776?via%3Dihub">speculation</a> and reduce housing affordability. </p>
<p>A US study found borrowers also tend to <a href="https://doi.org/10.1093/rof/rfy016">default</a> more.</p>
<p>A Danish <a href="https://doi.org/10.1162/rest_a_01146">study</a> found that once the interest-only lower repayment period is over and the loan reverts to principal and interest, those who didn’t make principal repayments suffered a large drop in disposable income.</p>
<h2>Financial flexibility comes with a catch</h2>
<p>With rates rising, interest-only loans may sound like an appealing way to have more cash available to cover other costs in life.</p>
<p>But just remember financial flexibility comes with a catch. An interest-only loan could be more expensive in the long run. </p>
<p>For some people, that cost will be worth it if it allows them to hold onto the house during a brief tough period or make more money investing elsewhere. But it’s a risk.</p>
<p>And when the interest-only loan ends, you’re still stuck with the task of paying off the money you borrowed from the bank in the first place (with interest).</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/should-i-pay-off-the-mortgage-asap-or-top-up-my-superannuation-4-questions-to-ask-yourself-170470">Should I pay off the mortgage ASAP or top up my superannuation? 4 questions to ask yourself</a>
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</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/188817/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian Lee does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>While authorities such as the Reserve Bank often see them as risky, interest-only loans can be helpful in some circumstances.Adrian Lee, Associate Professor in Property and Real Estate, Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1888912022-08-22T20:01:52Z2022-08-22T20:01:52ZWhat happens if I can’t pay my mortgage and what are my options?<figure><img src="https://images.theconversation.com/files/480027/original/file-20220819-25-12veju.jpg?ixlib=rb-1.1.0&rect=0%2C5%2C3988%2C2233&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Photo by Pat Whelen on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>With rising costs of living, including interest rate rises, many people are really worried about their mortgage. </p>
<p>So, what actually happens if you can’t pay your mortgage – and what are your options?</p>
<p>Here’s what you need to know.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-to-fix-australias-housing-affordability-crisis-negative-gearing-must-go-158518">Vital signs: to fix Australia's housing affordability crisis, negative gearing must go</a>
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</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480028/original/file-20220819-26-vpnqeb.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">It’s not particularly rare for a borrower to face a period of temporary financial hardship.</span>
<span class="attribution"><span class="source">Photo by Tierra Mallorca on Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>Payment deferrals, payment plans or getting fees waived</h2>
<p>It’s not particularly rare for a borrower to face a period of temporary financial hardship, often due to circumstances beyond their control. </p>
<p><a href="https://www.rba.gov.au/publications/bulletin/2021/sep/the-financial-cost-of-job-loss-in-australia.html">Job loss</a>, relationship breakdowns, natural disasters, injuries and illnesses all affect the capacity of householders to repay their loan, especially given mortgages tend to run over many years, if not decades.</p>
<p>Banks have “hardship” processes to deal with borrowers who are temporarily unable to repay their loan.</p>
<p>The <a href="https://www.ausbanking.org.au/">Banking Code of Practice</a>, to which most banks subscribe, provides guidelines for lenders to help consumers through financial difficulties. </p>
<p>One form of relief is a payment deferral or “holiday”. That’s where a customer is able to postpone repayments until the issue causing hardship is resolved. Many people used this option during COVID lockdowns. </p>
<p>However, a payment holiday sometimes simply “kicks the can down the road” and the customer is still in financial trouble when their temporary payment holiday ends.</p>
<p>Other options include payment plans. This is where you pay back less per month but the mortgage lasts longer overall. </p>
<p>Or, the bank may simply offer advice on how to handle finances until you’re back on your feet. </p>
<p>It is also possible for banks to waive discretionary fees (such as those related to overdue payments).</p>
<h2>Banks don’t really want you to default</h2>
<p>Banks typically do not want their customers to default on property.</p>
<p>They’re usually protected against losses themselves through lender’s mortgage insurance, but banks see mortgage holders as particularly valuable customers. They have shown they can obtain finance and repay loans. </p>
<p>Usually, it’s easier for the bank to make hardship arrangements with a customer - and build trust along the way - than it is to wind up a mortgage, seize the property and then have to deal with trying to sell it in a flagging market.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480029/original/file-20220819-15-jlfc4b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Mortgagee-in-possession can lead to lower sale price.</span>
<span class="attribution"><span class="source">Photo by RODNAE Productions/Pexels</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<h2>What about my credit score?</h2>
<p>Recent <a href="https://www.creditsmart.org.au/financial-hardship/changes-to-credit-reporting-from-july-2022/">changes</a> to the credit legislation make it easier to apply for a payment plan without affecting your credit score. </p>
<p>From July 1, 2022, under the terms of a financial hardship arrangement, a customer’s credit report will show they have made on time repayments for the period of the arrangement – providing they have followed the terms of the hardship agreement.</p>
<p>Credit reports will also indicate whether (but not why) a customer is in a financial hardship arrangement.</p>
<p>This information stays on a credit report for one year, then disappears. </p>
<p>Importantly, though, hardship information will be visible to other credit providers, and may affect a customer’s ability to get other loans during the period.</p>
<h2>I’m struggling. So what should I do?</h2>
<p>Contact your financial institution as early as you can. Your bank may be able to offer payment relief in the form of reduced payments or a holiday from repayments – or a combination of both. </p>
<p>You usually need to provide evidence for the reason for financial hardship, and there’s an expectation you’ll be able to resume repayments when the temporary issue is resolved.</p>
<p>Not every application for hardship will be successful, particularly if you have made promises to repay in the past and not followed through.</p>
<p><a href="https://moneysmart.gov.au/how-life-insurance-works/income-protection-insurance">Income protection insurance</a> (for those who plan for uncertainties) may help prevent the need for hardship arrangements in the first place.</p>
<p>If you see the issue as ongoing, rather than temporary, consider a different approach.</p>
<p>If you’re ahead on your mortgage (as many Australians were during the pandemic), or you have significant equity in your house, consider refinancing. That’s where you take out a new mortgage to repay an existing loan.</p>
<p>You may be able to get a lower monthly repayment, especially if you have built an equity stake greater than 30%.</p>
<p>It won’t always be an option, especially if you are a recent borrower facing rising interest rates, stagnant or falling house prices, and have limited equity. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480030/original/file-20220819-1146-svsca9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A growing number of Australians are worried about their home loan.</span>
<span class="attribution"><span class="source">Photo by mentatdgt/Pexels</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>In dire circumstances, you may be able to <a href="https://www.ato.gov.au/individuals/super/withdrawing-and-using-your-super/early-access-to-your-super/">access your superannuation early</a> (which means you may have a lot less to retire on).</p>
<p>If you really do need to sell, it is better to sell the property of your own volition, rather than having a forced sale.</p>
<p>Mortgagee-in-possession (which is where the bank sells the house) can often lead to a lower sales price than a vendor-led campaign, and the time frame may not suit you.</p>
<p>Free help is available. The <a href="https://www.arca.asn.au/">Australian Retail Credit Association</a> provides information on how hardship processes are reported, while the <a href="https://financialrights.org.au/factsheets/mortgage-stress/">Financial Rights Legal Centre</a> helps advocate for consumers through the mortgage stress process.</p>
<p>The government’s <a href="https://moneysmart.gov.au/managing-debt/financial-hardship">Moneysmart</a> site also provides information on how to navigate the hardship process.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-housing-game-has-changed-interest-rate-hikes-hurt-more-than-before-184553">The housing game has changed – interest rate hikes hurt more than before</a>
</strong>
</em>
</p>
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<img src="https://counter.theconversation.com/content/188891/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Grant is affiliated with the Australian Institute of Credit Management, and has conducted research in the past for Commonwealth Bank and the credit bureau Illion. This story is part of a series on financial and economic literacy funded by Ecstra Foundation.</span></em></p>Banks typically do not want their customers to default on property and have processes in place to help reduce the risk of this happening.Andrew Grant, Senior Lecturer in Finance, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1860722022-08-03T13:15:02Z2022-08-03T13:15:02ZUK house prices: history says the market is in for a long slowdown not a crash<p>It’s going to be easier to get on the property ladder following a <a href="https://www.theguardian.com/money/2022/aug/01/bank-of-england-scraps-mortgage-affordability-test">recent decision</a> by the Bank of England to relax some of the criteria for getting a mortgage. Combined with <a href="https://www.itv.com/news/2022-06-01/boe-housing-market-starting-to-turn-but-interest-rates-not-returning-to-90s">expectations of a slowdown</a> in the property market, this news will be something of a relief to those who have been unable to buy a home due to booming prices in recent years.</p>
<p>People’s ability to buy property is at a record low in England, with the average house costing <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/housing/bulletins/housingaffordabilityinenglandandwales/2021#measuring-the-data">nearly nine times</a> average annual disposable household income. Scottish buyers pay more than five times, on average, while Welsh house prices are currently six times disposable income.</p>
<p>Affordability has been affected by a recent <a href="https://www.halifax.co.uk/assets/pdf/june-2022-halifax-price-index.pdf">boom</a> in house prices as demand for new properties rose after pandemic lockdown restrictions were lifted. The number of houses changing hands during this time has kept prices elevated, with transactions currently at the <a href="https://www.gov.uk/government/statistics/monthly-property-transactions-completed-in-the-uk-with-value-40000-or-above">highest level</a> since just before the global financial crisis in 2008. </p>
<p>But while the latest Nationwide figures for UK house price growth are still in <a href="https://www.nationwidehousepriceindex.co.uk/reports/annual-house-price-growth-stays-in-double-digits-as-july-sees-twelfth-successive-monthly-increase">double digits</a>, the rise has slowed in recent months. A crash, which is generally understood as a price drop of 20% or more, is unlikely. But a correction (a fall of between 10% and 20%) could happen if the economy takes a substantial dip. This prospect looks increasingly likely as inflation looks set to <a href="https://www.theguardian.com/business/2022/aug/03/inflation-will-soar-to-astronomical-levels-over-next-year-thinktank-warns">pass 10%</a> in coming months, which would cause consumers and businesses to rein in spending.</p>
<h2>House price growth</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Bar chart showing house price changes" src="https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=310&fit=crop&dpr=1 600w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=310&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=310&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=390&fit=crop&dpr=1 754w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=390&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/477016/original/file-20220801-67954-1hzec1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=390&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual percentage change in UK house prices, June 2019 to June 2022.</span>
<span class="attribution"><a class="source" href="https://www.nationwidehousepriceindex.co.uk/charts">Nationwide House Price Index</a></span>
</figcaption>
</figure>
<p>While buyers may be pleased to hear forecasts of falling house prices, this is not such good news for sellers. But both sides of the market will be interested in the likely strength of any housing market correction. </p>
<p>The busts of the late 1980s and 2000s followed similar price booms to the one we have just experienced. These periods show that, if a widely <a href="https://www.theguardian.com/business/2022/jul/26/imf-slashes-global-growth-forecast-as-top-three-economies-stall">expected recession</a> follows the current slowdown in house prices, the market could fall more sharply and then experience a longer-term chilling effect. In other words, homeowners and prospective buyers can expect a correction, rather than a crash, followed by a slow recovery. </p>
<h2>1980s revival</h2>
<p>House prices are typically affected by three factors:</p>
<ul>
<li><p>Real incomes (or incomes adjusted for inflation), which are currently being <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/latest">squeezed</a> by the cost of living crisis as wages do not keep up with <a href="https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/june2022">rising inflation</a> – this affects people’s ability to afford a new home.</p></li>
<li><p>Interest rates, which are also <a href="https://www.theguardian.com/business/2022/jun/16/bank-of-england-raises-interest-rates-to-125-to-tackle-inflation">on the rise</a> as the Bank of England tries to address inflation – this means it is more costly to borrow money for a mortgage on a home.</p></li>
<li><p>The availability of mortgage finance, which enables people to borrow money for a new home – this is currently <a href="https://www.fca.org.uk/data/commentary-mortgage-lending-statistics-q1-2022">fairly stable</a>.</p></li>
</ul>
<p>The UK housing market downturn that started in the 1980s saw <a href="https://researchportal.hw.ac.uk/en/publications/housing-markets-and-planning-policy">prices fall</a> in absolute terms for the first (recorded) time, and this continued until 1994. It was not until 1997 that house prices began to rise again by more than 5% per annum. Annual house price inflation then persisted above this level for the next 10 years until its peak in the final part of 2007. </p>
<p>During the recession that followed the 2008 global financial crisis, house prices <a href="https://www.emerald.com/insight/content/doi/10.1108/IJHMA-10-2012-0052/full/html">fell consistently</a> across all regions until the spring of 2009. The national average drop was 21% during this time, with regional variations ranging from 20% to 26% (not including Northern Ireland). The highest percentage declines were in the southern regions of England.</p>
<p>The anatomies of these two busts were very different, even though both saw a fall in nominal (non-inflation adjusted) prices linked to recession. The 1990s downturn was driven by forced property sales due to extreme interest rates and high unemployment – households that were in negative equity were unable to make their mortgage payments. </p>
<p>In contrast, the downturn of the late 2000s saw relatively <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/articles/anoverviewoftheuklabourmarket/2015-02-27#:%7E:text=Employment%20rate%20for%20people%20aged%2016%20to%2064%2C%20UK%2C%201980%20to%202014">high unemployment</a> but <a href="https://www.bankofengland.co.uk/boeapps/database/Bank-Rate.asp">low interest rates</a>, which still generated a fall in house prices. During this time, the market was particularly negatively affected by banks’ <a href="https://www.emerald.com/insight/content/doi/10.1108/IJHMA-10-2012-0052/full/html">widespread withdrawal</a> of mortgage finance in the wake of the financial crisis due to their financial collapse, leading in some cases to <a href="http://news.bbc.co.uk/1/hi/business/7249575.stm">nationalisation</a>. Their priority was rebuilding their capital base rather than lending. Reductions in <a href="https://fortune.com/2020/10/07/boris-johnson-generation-buy-5-mortgage-plans-risk-financial-crisis/#:%7E:text=as%20banks%20naturally%20pulled%20back%20on%20lending.">loan to value ratios</a> (the amount a bank is willing to lend as a percentage of the property price) from 95% to 75% significantly reduced buyers’ purchasing power.</p>
<p>In both of these periods, recessions caused a house price collapse, but not all recessions actually lead to a price drop. The recessions of the mid-1970s and early 1980s only caused real house prices to fall – that is, they declined in line with inflation, rather than seeing an actual fall in value. One reason may be that these recessions occurred prior to the rise in lower-income owner occupation through schemes like <a href="https://www.bigissue.com/news/housing/right-to-buy-at-40-the-controversial-policy-that-transformed-lives/">right-to-buy</a> that were launched in the 1980s. Such households are more susceptible to financial difficulties during recessions.</p>
<p>The good news for homeowners then is that house prices do not typically fall unless there is a recession, and even then it is only a possibility. On the other hand, the current <a href="https://www.bbc.co.uk/news/business-57764601">rising interest rate</a> environment in the UK could have significant consequences for monthly household budgets. Together with mounting living costs, this would increase mortgage costs, perhaps even making them unaffordable for some homeowners. It might be possible to address this to some extent by remortgaging, however.</p>
<p>Past experience of UK house price corrections shows that the recovery from a downturn can be slow, taking many years. During this time, opportunities to move up the property ladder – to upgrade in line with growing family needs, for example – will be limited. Modest or no increases in house prices also mean that households do not accumulate the deposit needed for a new mortgage for a more expensive house. </p>
<p>So, the prospect of a global recession in 2023 means there is the potential for falling house prices, and even a correction could have a prolonged negative effect on the housing market. In other words, the UK housing market could be facing a long-term period of stagnation.</p><img src="https://counter.theconversation.com/content/186072/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Colin Jones does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>History indicates house prices are more likely to see a correction and prolonged stagnation, not a crashColin Jones, Professor of Real Estate, Heriot-Watt UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1861462022-07-06T15:57:14Z2022-07-06T15:57:14ZTinkering with the mortgage market won’t solve the UK housing affordability crisis<figure><img src="https://images.theconversation.com/files/472793/original/file-20220706-18-j1l7nu.jpg?ixlib=rb-1.1.0&rect=56%2C18%2C6272%2C4074&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Potential government measures to help more people get on the housing ladder are unlikely to help first-time buyers.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/side-view-young-couple-looking-window-146162657">sirtravelalot/Shutterstock</a></span></figcaption></figure><p>UK borrowers may see the return of larger, longer-term loans as the government plans a comprehensive review of the mortgage market with the aim of <a href="https://www.reuters.com/markets/europe/uk-launch-review-mortgage-market-pm-boris-johnson-says-2022-06-09/">boosting access to finance</a> for first-time buyers. Rather than addressing the real problems with UK housing affordability though, this approach seems to be aimed at helping dig the government out of a housing policy hole.</p>
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<p>Last May, Michael Gove, the secretary of state for Levelling Up, Housing and Communities, <a href="https://www.building.co.uk/news/government-not-bound-by-300000-home-manifesto-target-says-gove/5117470.article">announced</a> that the government’s housebuilding target “risks making someone’s perfect arithmetic the enemy of the common good”. This statement has been widely interpreted as signalling the end of a Conservative Party manifesto commitment to deliver 300,000 new homes annually in England by the mid 2020s. It also follows the <a href="https://www.ft.com/content/a19272a3-4af0-438e-9b8b-bace6fbf1548">abandonment of planning reforms</a> in May that were unpopular in Tory heartlands and were a significant factor in the party’s loss of the <a href="https://www.bbc.co.uk/news/uk-politics-57535928">Chesham and Amersham by-election</a> last year.</p>
<p>By increasing housebuilding rates, the government wanted to tackle the decline in housing affordability that has been driving down <a href="https://www.theguardian.com/business/ng-interactive/2021/mar/31/uk-housing-crisis-how-did-owning-a-home-become-unaffordable">UK home ownership</a> rates. Whether the government was right to place so much emphasis on planning reform is questionable, particularly considering the housebuilding industry <a href="https://institute.global/policy/planning-fail">consistently fails</a> to build enough houses to match the units of planning permission awarded. Research also shows it takes an awful lot of <a href="https://www.tandfonline.com/doi/abs/10.1080/02673030500291082?journalCode=chos20">additional housebuilding</a> over a sustained period to make material differences to affordability. </p>
<p>Abandoning the housebuilding target leaves the government without any meaningful response to the affordability crisis, however. This has led to the government’s new emphasis on the mortgage market: if people can borrow more, then more people will be able to afford to buy houses.</p>
<p>History shows this isn’t always the case, though. Government policy since the financial crisis has been to limit borrowing (or lending). <a href="https://www.mortgagefinancegazette.com/features/how-the-mortgage-market-might-look-in-2013-09-01-2012/">Since 2013</a>, lenders have been required to assess mortgage applicants’ ability to make their payments and to withstand higher interest rates. The Bank of England recently told lenders they could <a href="https://www.bankofengland.co.uk/news/2022/june/financial-policy-committee-confirms-withdrawal-of-mortgage-market-affordability-test">drop this requirement</a> from August 1 2020. </p>
<p>But mortgage lenders will remain limited in the number of high loan-to-income mortgages they can keep on their books. After all, these measures were introduced to avoid the booms in <a href="https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/1992/house-prices-arrears-and-possessions.pdf">mortgage arrears</a> and repossessions seen in the early 1990s and during the 2008 global financial crisis, as well as the systemic failures that forced the government to <a href="https://commonslibrary.parliament.uk/research-briefings/sn05748/">rescue multiple banks</a> back in 2008. And while raising the amount that can be borrowed will help some people buy houses, at least some of this extra finance will also contribute to higher house prices as demand for new homes rises. This will benefit existing owners, not first-time buyers. </p>
<h2>History repeating</h2>
<p>All of this has happened before. When mortgage finance was deregulated in the 1980s, access to home ownership increased, but the sudden expansion of mortgage finance also fuelled a <a href="https://www.jrf.org.uk/sites/default/files/jrf/migrated/files/housing-markets-volatility-full.pdf">house price boom</a>. This unravelled when interest rates were raised in response to rising inflation, giving rise to largescale mortgage arrears and repossessions. With a striking lack of institutional memory, mortgage lending criteria relaxed again in the run up to the financial crisis, resulting in the growth of the sub-prime sector that contributed to the subsequent market crash in 2007.</p>
<p>Proponents of increasing people’s access to mortgage finance hope long-term fixed rate mortgages will shield borrowers from these risks. The development of mortgage guarantees might also help extend coverage within groups such as the self-employed who have found it more difficult to secure mortgage finance over the past 15 years. But even if ways can be found to expand lending while managing risk better than in the past, this graph showing the decline in mortgaged home ownership rates illustrates the limits of mortgage credit as a means of expanding lending:</p>
<h2>UK mortgaged home ownership rates</h2>
<figure class="align-center ">
<img alt="Line graph showing declining UK home ownership levels between 2002 and 2021" src="https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/472797/original/file-20220706-13-fzechr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK mortgage ownership by age group (2002 – 2021)</span>
<span class="attribution"><a class="source" href="https://www.gov.uk/government/statistics/family-resources-survey-financial-year-2020-to-2021">Family Resources Survey, Department for Work and Pensions</a></span>
</figcaption>
</figure>
<p>Mortgaged ownership was dropping before the financial crisis – at a time when lenders were falling over one another to provide mortgage finance. As the graph shows, between 2002-03 and 2007-08, the proportion of households who owned their houses with a mortgage fell from 41% to 35%. Among households aged 25-34 years old, the fall was more dramatic, with mortgaged ownership falling by 10 percentage points to 49% during this period. As house prices rose, many hopeful homeowners struggled to take out a 95%-plus loan-to-value mortgage because they couldn’t afford the repayments – there comes a point when you cannot borrow your way out of an affordability crisis.</p>
<p>And this remains the case today. The <a href="https://www.ukhousingreview.org.uk/ukhr22/compendium.html">UK Housing Review</a> affordability index suggests that buying a house was more affordable in 2020 than it was in 2007 – on the eve of the financial crisis when borrowing criteria was extremely relaxed – but remains less affordable than in 1994, when house prices had bottomed out following the 1980s boom.</p>
<p>The UK is not alone. Mortgaged home ownership <a href="http://eprints.gla.ac.uk/269894/1/269894.pdf">has fallen</a> among prime-age households in almost every EU country. Since the financial crisis, ultra-low interest rates have protected the value of assets such as houses. Other responses to the pandemic – including the UK’s <a href="https://www.bbc.com/news/business-58738741">stamp duty holiday</a> – have supported this trend.</p>
<p>Ironically, the rise in consumer price inflation creates the possibility of allowing real house prices to adjust downwards while protecting existing homeowners from negative equity. But this will only restore affordability if real incomes rise to enable people to buy. As <a href="https://www.bigissue.com/news/employment/national-strike-summer-of-discontent-cost-of-living-crisis/">striking workers</a> across country right now will most likely affirm, there is little indication of that happening at the moment.</p><img src="https://counter.theconversation.com/content/186146/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Stephens receives funding from ESRC, and is lead editor of the UK Housing Review (published by the Chartered Institute of Housing).</span></em></p>Government moves to encourage longer and larger home loans won’t address housing affordability in the UKMark Stephens, Mactaggart Chair in Land, Property & Urban Studies at the University of Glasgow, University of GlasgowLicensed as Creative Commons – attribution, no derivatives.