Friday, 8 November 2013

What about the losers if rates rise?

This is based on a reply to a query, and is a combination of arithmetic (ie a few times more people lose from low rates, currently getting less than a third of their income under market rates) and choice.

People saving have a choice limited by the market. There is a range of fixed rate protected investments, and if you take risks for more firstly few are even fixed and none are safe, and could potentially lose everything. Pensions are even less flexible as they are either state run or bought long in advance and you are stuck with them. Buying a property however is a free personal choice, ostensibly based on ability to pay, and although the old rules are long gone fixing a maximum of 3-4 times income for a mortgage, they should still show everyone the simple table of monthly repayments at every rate possible.

There are no mysteries buying a house, it's very simple to know how much you can afford now and ahead, and if you are not certain you can in future you are not ready to buy. Otherwise you buy at the level where whatever today's interest rate is you can comfortably cover the maximum, like the 15% we had in the 70s. If not, again you must drop your buying price limit. Who should even be allowed to gamble (as it is not their money they are borrowing) at rock bottom rates they won't go up, as they should never have been allowed to buy for that much on their income? Yes, people shouldn't need the law to stop them making bad decisions, but as firstly it is not their money (OK, the lenders should not be reckless either) but the consequences of failure caused the last world recession and quite possible to happen over and over again as the rules haven't changed to stop it, laws need to be there to restrict mortgage to income ratios for the sake of the whole economy. Until that happens (one can dream) no one buying beyond their means can complain if interest rates ever do go up and they are caught as they all knew exactly how much they could afford when buying the property and why would anyone want to live in fear for years worrying if the rates will rise and they'll be stuck?

Mortgage borrowing is a personal decision, and as a result people must take a personal responsibility for it. They do not have a choice in investing when they need every penny to live on so can't risk losing the principle for risky options, so when 3/4 or so of the population are forced to earn a third or quarter of what they should be then being concerned about the 1/4 who would pay more if they rose, considering not a single one of them should ever have bought not knowing they could cover all possible rates it's a fairly clear picture which is the right one for society.

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