Interest rates

[tillygirl]

So, another hike in interest rates to 5%. How many orgers are affected by this? Luckily we chose a fixed rate but only for 2 years. Here's hoping the rates will stick at 5% and will be reduced next year sometime.

[Cattach]

So, another hike in interest rates to 5%. How many orgers are affected by this? Luckily we chose a fixed rate but only for 2 years. Here's hoping the rates will stick at 5% and will be reduced next year sometime.

When we bought our house 20 years ago the rate was 15% so count yourself lucky! However, as the rate came down (slowly at first) we did not change our repayment and consequently ended up paying much less in the long run and paid off our mortgage more than six years early.

[jaykay]

[quote=tillygirl;158333]So, another hike in interest rates to 5%. How many orgers are affected by this? Luckily we chose a fixed rate but only for 2 years. Here's hoping the rates will stick at 5% and will be reduced next year sometime.[/

There will be different points of view on this. It all depends on whether you are a borrower or a saver. Higher interest rates is better for people with money in pension schemes etc

[DrSzin]

Higher interest rates is better for people with money in pension schemes etcThis may be the case if the pension scheme invests in (say) government bonds, but it's not (necessarily) the case if it's in the stock market. The vagaries of the latter are hard to predict - the FTSE 100 dropped 20-odd points this morning but it's heading back up now. The FTSE 250 is up, but the others are essentially unchanged - the interest-rate rise will already have been anticipated by the market.

I switched to a new variable-rate mortgage a couple of months ago because the interest rate was about 0.4% lower than the fixed rates on offer from the same company. Everyone "knew" interest rates would go up to keep inflation under control, but I decided to take a bit of a gamble. I will still be paying a bit less than I would be paying on a fixed-rate, but the jury is still out over who shall have the last laugh - I hope!

I remember 15% interest rates all right. Our current mortgage is almost five times as large as the one we had 20 years ago, but our mortgage payments are less than 50% higher.

[j4bberw0ck]

This may be the case if the pension scheme invests in (say) government bonds, but it's not (necessarily) the case if it's in the stock market.

Not really - but don't get me going on pension schemes and the incompetence of the FSA......

The coupon (rate of interest on government bonds) is unchanged by BoE rate changes - it's guaranteed for the life of the particular bond. So if you have money in a "5% Treasury Stock 2012" (say - I made it up for ease), it'll pay you 5% of whatever nominal value of stock you hold, each year. But you might have to pay more than 100p to buy a £1 stock unit - so if you invest £1000 in stock, you might only get £900 of stock units, or with some undated bonds you might get £1400 of stock units.

The 2012 in the example just means that's when it matures and the Govt will give holders £1 for every £1 unit of stock they hold. Undated stock just means that it gets repaid to holders when the Govt feels like it.

The price of stock goes up and down loosely in line with interest rates, because with rates now at 5% some people will sell bonds because they can now do better than 5% at the building society or bank.... so the price per £1 of some stocks might reasonably be expected to fall. Slightly. But you still get your fixed 5% of the nominal value - so if you buy at the new lower price your yield on the money has risen - but you still get the same amount of interest each year for each stock unit you hold..... so the rate rise won't affect you if you hold bonds.

(hope you're concentrating - there's a test after :lol: )


The vagaries of the latter are hard to predict - the FTSE 100 dropped 20-odd points this morning but it's heading back up now. The FTSE 250 is up, but the others are essentially unchanged - the interest-rate rise will already have been anticipated by the market.

FTSE-watching is pointless, really - it dropped 20 this morning, but was up 70 in a day last week. And it's been marching relentlessly upwards for 3 years. It'll crash again just as Joe Public finally starts to believe the shiny graphs those "advisers" at the bank show them every time they go to pay in a cheque, and start to put their money into luvverly savings bonds with Legal and General, or Norwich Union.


I switched to a new variable-rate mortgage a couple of months ago because the interest rate was about 0.4% lower than the fixed rates on offer from the same company. Everyone "knew" interest rates would go up to keep inflation under control, but I decided to take a bit of a gamble. I will still be paying a bit less than I would be paying on a fixed-rate, but the jury is still out over who shall have the last laugh - I hope!

My guess would be the same as yours. The US economy is slowing down and looks precarious. The rate rise today was because the doves on the MPC won almost a year ago when they should have raised rates and didn't. Consequently, things are now a bit sticky; rates are up, which won't help industry and profits - and someone has to make those things to keep our burgeoning army of "public servants" in the style to which they've become accustomed - and yet America and Germany are slowing down.... so if they slow further, our rates will be too high and have to come down again.


I remember 15% interest rates all right

Sadly, so do I. But at least it forced us out of the European Monetary System (as was) and laid the foundations for the low-interest rate economy which has done us so well in the last 15 years.

[golach]

5% Interest, I say for myself, Great!!!......I am lucky to be in the position of having paid all my mortgage, and what little HM Treasury paid me as a pension is in the bank and is now earning a decent interest.
I do feel sorry for first time buyers especially in Edinburgh, I would not be able to afford my own house these days.

[j4bberw0ck]

what little HM Treasury paid me as a pension is in the bank and is now earning a decent interest.

Maybe....... but if you get 5% on the money, and take off basic rate tax at 20%, that leaves 4% net. Then take out inflation (officially 2,8%, ha ha) and you've got 1.2%. Not very decent, really - especially when you consider than inflation's official measurement was changed a few years ago to adopt the European standard which doesn't take housing costs into account, but is heavy on stuff like DVDs, computer equipment and goods for personal consumption, whose prices are crashing because of the amazing efforts of our little Chinese friends. So it makes Brown, G., look good; maybe even "prudent". :lol:

Factor in the real rate of inflation as it hits your pocket and mine and 8% might be a better guess..... so your money's going backwards......

Edit: the "shopping basket" is here: http://www.statistics.gov.uk/downloads/theme_economy/CP_Brief_Guide_2004.pdf

[DrSzin]

The coupon (rate of interest on government bonds) is unchanged by BoE rate changes - it's guaranteed for the life of the particular bond. <Lots of useful informative stuff deleted.>Yeah, I knew that, but I was assuming that the interest rate on new issues would be higher. As you say, increases in the BoE base rate have no effect on the interest paid out on bonds that you already hold, so it was a lousy example. :o


FTSE-watching is pointless, really - it dropped 20 this morning, but was up 70 in a day last week.Absolutely. Somehow, I seem to have deleted the sentence that said today's fluctuations were tiny on the scale of things and should be ignored.


My guess would be the same as yours. The US economy is slowing down and looks precarious. The rate rise today was because the doves on the MPC won almost a year ago when they should have raised rates and didn't. Consequently, things are now a bit sticky; rates are up, which won't help industry and profits - and someone has to make those things to keep our burgeoning army of "public servants" in the style to which they've become accustomed - and yet America and Germany are slowing down.... so if they slow further, our rates will be too high and have to come down again.I hadn't picked up that Germany is slowing down again - I must be neglecting my homework. :o


Sadly, so do I. But at least it forced us out of the European Monetary System (as was) and laid the foundations for the low-interest rate economy which has done us so well in the last 15 years.I was actually thinking of the mid-eighties when mortgage rates were around 15%, but 'tis indeed true that they also reached those heights in '90/91 before falling back to 10% in '92. If I remember rightly, the pound crashed out of the EMS before the putative rise to 15% on 16 Sep 1992 - thank goodness. Black Wednesday saved the UK's economic backside, but it sealed John Major's fate. IMHO UK monetary policy bordered on insanity during the Major/Lamont chancellorships. TBW got many things wrong during her premiership but I think she was spot-on in her distaste for Major's policies and the EMS.


Factor in the real rate of inflation as it hits your pocket and mine and 8% might be a better guess..... How did you reach the figure of 8%? Is it a guessimate - largely based on the increase in energy costs?

[j4bberw0ck]

I was assuming that the interest rate on new issues would be higher.

I see what you mean, but the link is tenuous if it exists at all. New issues are priced on annuity rates rather than current money rates (actually, that's a bit ass-backwards, but it'll do). If the Govt were to launch an issue now they could launch say an Index Linked bond at a pitiful rate of interest, but on maturity it would be redeemed at the index linked value of £1 now - and that's what the incompetence of the FSA forced company pension schemes into "to avoid risk with pensioners money" - thus ensuring that all of us in the private sector who have only an employer's scheme to fall back on will retire in penury and need bailing out with Tax Credits and Minimum Income Guarantees. But at least it guarantees the career paths and future handsome pensions of several tens of thousands of public servants, who do the means testing. Let's all celebrate!


I hadn't picked up that Germany is slowing down again - I must be neglecting my homework
There's a confidence index published in Germany and it's at its lowest level for 13 years. German growth has slowed way down and may be under 1% next year.


If I remember rightly, the pound crashed out of the EMS before the putative rise to 15% on 16 Sep 1992 - thank goodness. Black Wednesday saved the UK's economic backside, but it sealed John Major's fate.
A salutary lesson to all those who believe that Govts can control a free market - especially an international one. It's a lesson the EU (and the Scottish Socialists and the SNP, amongst others) would do well to take on board even now. George Soros - http://en.wikipedia.org/wiki/George_Soros - made personal fortune of $1 billion dollars in proving it.


IMHO UK monetary policy bordered on insanity during the Major/Lamont chancellorships. TBW got many things wrong during her premiership but I think she was spot-on in her distaste for Major's policies and the EMS.
Peerie Norrie is apparently bitter to this day about being blamed by Major :lol:


How did you reach the figure of 8%? Is it a guessimate - largely based on the increase in energy costs?
Yes, I'm afraid it's an off-the-cuff guesstimate, but based in part on empirical observation in helping people analyse their expenditure. The rate of inflation is quite different for younger people and older people now because of the makeup of the index; it comes out more favourably for younger folk who spend a higher proportion of their income (relatively) on computers, mobile phones, DVDs, computer games and all the other stuff that's collapsing in price. Conversely, older people tend to see more of their income spent on fuel, which has rocketed in price.

And as you said - it's only a number! :lol: