Buy now before interest rates rise?

nino1

I read in a newspaper article (sorry, don't have the link) that it may be better to buy this year for first time buyers and get your interest rate fixed for 3-5 years rather than waiting for the prices to fall and end up paying higher interest rates on a cheaper house.

any thoughts?

how high do they predict interest rates to rise to in the next few years?

Mr. Loverman

nino1 wrote: »

I read in a newspaper article (sorry, don't have the link) that it may be better to buy this year for first time buyers and get your interest rate fixed for 3-5 years rather than waiting for the prices to fall and end up paying higher interest rates on a cheaper house.

any thoughts?

how high do they predict interest rates to rise to in the next few years?

It is likely interest rates will rise simply because they are at an historic low.

Just like house prices are likely to continue to drop as they are still quite high compared to non-bubble prices.

I would be very careful taking advice from anyone who is trying to find reasons for you to buy now. In my experience they always have some sort of vested interest in people buying.

Calculate how much a mortgage will cost if the property costs 200k at 3% and then at 150k at 3%.
Then calculate how much a mortgage will cost if the property costs 200k at 5% and then at 150k at 5%.

I would bet the interest rates play less of a role than the property price decrease.

OMD

It is too late anyway. Fixed rates have risen and will rise more in the length of time it would take to find and buy a house. It is a bit of a dubious idea anyway unless going for a very short mortgage (less than 10 years) or else getting one of the very low trackers which have long gone.

nino1

thanks for the replys. I will be a first time buyer so i am fairly new to this.
Do you think that the interest rates can rise to even higher than 5%?
I want to calculate my repayments based on the highest level of interest rates so that i can still afford repayments even if there is a big increase in interest rate.
you say that the interest rates are at a record low, what was the highest it was in recent years?

Mr. Loverman

nino1 wrote: »

Do you think that the interest rates can rise to even higher than 5%?

Yeah, I would imagine they will go higher than 5%. For example if the ECB set interest rates to 5% your mortgage might cost 8%.

nino1 wrote: »

you say that the interest rates are at a record low, what was the highest it was in recent years?

It was 12% in Ireland about 20 years ago as far as I remember.

http://www.ronanlyons.com/wp-content/uploads/2009/06/long-run-real-interest-rates.jpg

OMD

nino1 wrote: »

thanks for the replys. I will be a first time buyer so i am fairly new to this.
Do you think that the interest rates can rise to even higher than 5%?
I want to calculate my repayments based on the highest level of interest rates so that i can still afford repayments even if there is a big increase in interest rate.
you say that the interest rates are at a record low, what was the highest it was in recent years?

Interest rates will definitely go above 5% but when that happens is the question. PTSB are already charging over 5% on variable rates. There is a very good chance that the ECB will have rates 1% higher by this time next year. That would put it at 2.25%. Banks would then be charging at least 4.5% variable by then. How much rates rise after that is anyones guess but it is safe to assume they will rise.

OMD

Mr. Loverman wrote: »

Yeah, I would imagine they will go higher than 5%. For example if the ECB set interest rates to 5% your mortgage might cost 8%.




It was 12% in Ireland about 20 years ago as far as I remember.

http://www.ronanlyons.com/wp-content/uploads/2009/06/long-run-real-interest-rates.jpg

It went to about 14% (banks rate) but that was with an Irish central bank. The highest ECB rate was 4.25% but that doesn't mean 4.25% is the limit. Banks will add about 2% to this.

Thoie

From CSO (1975-2008), the highest representative building societies mortgage interest rate since 1975 was 16.25% during 1981/2.

In 1992/3 it was 13.99%

[Embedded Image Removed]

The average interest rate during that period was just over 9%. If you had taken a 25 year mortgage out in 1983, your average interest rate would have been just under 8%.

When I was getting my first mortgage and wavering between fixed, tracker, variable, the fixed rate looked appealing solely on the basis of the comfort of knowing exactly how much I'd have to pay each month, and also hedging against interest rates rising.
A broker pointed out to me that the banks have entire teams of experienced people working on likelihoods, possibilities etc. to do their best not to leave themselves short on the fixed rates. As has been proven since (with tracker mortgages) they don't always get it right, but they've got a better chance of getting it right than you do.

Addition:
ECB rates can be seen here - the highest on that table was 5.75 in 2000. Mortgages generally seem to be about 2-3% above the ECB rate, which would bring you to the 8-9% rate. If I was starting out at the moment I'd be stress testing myself for 9%.

nino1

thanks guys.
Would it be fair to say you should assume interest rates will rise to 8%-10% and make sure you can afford repayments based on these rates in a worst case senario?

Am i working this out right?

myself and the wife are looking for a mortgage of €400,000.
for a 30 year mortgage €400,000/30= €13,333/year= €1,111/month
interest rate @10% gives €1,111 + €1,333 = €2,444 monthly repayments

sorry if these questions are very simplistic. I just want to be in a situation where interest rates rising never becomes a huge problem for me .

nino1

hi thoie,
just saw your post now, thanks for that

Mr. Loverman

nino1 wrote: »

thanks guys.
Would it be fair to say you should assume interest rates will rise to 8%-10% and make sure you can afford repayments based on these rates in a worst case senario?

Am i working this out right?

myself and the wife are looking for a mortgage of €400,000.
for a 30 year mortgage €400,000/30= €13,333/year= €1,111/month
interest rate @10% gives €1,111 + €1,333 = €2,444 monthly repayments

sorry if these questions are very simplistic. I just want to be in a situation where interest rates rising never becomes a huge problem for me .

http://www.drcalculator.com/mortgage/ie/

EUR 400,000 x 30 years @ 10% = EUR 3,500 per month.

(Note tax relief will reduce this somewhat).

Thoie

nino1 wrote: »

thanks guys.
Would it be fair to say you should assume interest rates will rise to 8%-10% and make sure you can afford repayments based on these rates in a worst case senario?

Am i working this out right?

myself and the wife are looking for a mortgage of €400,000.
for a 30 year mortgage €400,000/30= €13,333/year= €1,111/month
interest rate @10% gives €1,111 + €1,333 = €2,444 monthly repayments

sorry if these questions are very simplistic. I just want to be in a situation where interest rates rising never becomes a huge problem for me .

I'm afraid you've gone too low - you haven't taken compound interest into account. Take a look here. €400k over 30 years @10% comes to about €3,500 a month.

Do take into account though that as you get older, your salary might rise, so by the time interest rates reach that high (if they do), the sum might not seem so horrific. The other thing is that in the early days of your mortgage, what you're paying is mostly interest, so if you can chuck an extra €100 or so a month, or any lump sums into the mortgage now, you're reducing the capital, and thereby reducing the overall interest to be paid.

Treehouse72

nino1 wrote: »

thanks guys.
Would it be fair to say you should assume interest rates will rise to 8%-10% and make sure you can afford repayments based on these rates in a worst case senario? .

Well, yes, but the bank will not give you a mortgage without having stressed tested to this ballpark anyway. In that sense, it's not a mistake they are likely to leave up to you to make.

Also, there is a theory that says you should buy when IR's are high, not low. This seems counter-intuitive and somewhat illogical, but the theory runs that if you buy when they are high it usually means the price of the house itself is at it's lowest (on the basis that getting credit to buy it is more difficult thus depressing the price). The opposite is true when you buy at the bottom of the IR cycle: the relative ease of getting a mortgage is reflected in a higher sales price.

In addition, if you buy at the top of the cycle, the only way for IR's to go is down. This way, at the start of the mortgage you might be paying a higher interest, but later in the mortgage you get to ride falling interest rates all the way down. Again, there is the opposite effect buying at the bottom of the cycle. It also helps with budgeting if you know the repayments when you buy will be the highest they're likely to be over the lifetime of the mortgage.

Finally, any saving you make by buying now to get a lower IR will be eaten up by price falls anyway. Squeezing 2 or 3 years out of cheap rates is utterly pointless if the amount you "save" is wiped out by a fall in the value of your home. And on-going house price falls are a certainty.

Mr. Loverman

Indeed.

I would rather have higher interest rates and no negative equity than lower interest rates and negative equity.

OMD

Thoie wrote: »

Addition:
ECB rates can be seen here - the highest on that table was 5.75 in 2000. Mortgages generally seem to be about 2-3% above the ECB rate, which would bring you to the 8-9% rate. If I was starting out at the moment I'd be stress testing myself for 9%.

I am afraid you are looking at the wrong figures. The highest ECB rate was in June 2000 but it was 4.25 not the 5.75 you are quoting. Average bank interest rates for next 30 years are unlikely to be as high as 8-9% (but you never know). Stressing for 9% is being very conservative, but as I said you never know. Looking at average rates of up to 7% would be prudent.

OMD

Treehouse72 wrote: »

This way, at the start of the mortgage you might be paying a higher interest, but later in the mortgage you get to ride falling interest rates all the way down. Again, there is the opposite effect buying at the bottom of the cycle. It also helps with budgeting if you know the repayments when you buy will be the highest they're likely to be over the lifetime of the mortgage.

.

Just remember that interest is charged on the outstanding balance. So if interest rates jump near the end of your mortgage term the effect on you is much smaller than high rates in the early days of a mortgage. It is all guesswork really. We don't really know what interest rates will be next year never mind in 20 years.

Thoie

OMD wrote: »

I am afraid you are looking at the wrong figures. The highest ECB rate was in June 2000 but it was 4.25 not the 5.75 you are quoting. Average bank interest rates for next 30 years are unlikely to be as high as 8-9% (but you never know). Stressing for 9% is being very conservative, but as I said you never know. Looking at average rates of up to 7% would be prudent.

Huh - I thought the marginal lending facility (the right hand column) is the one that's of importance to mortgages - for example that's what trackers are based on, but I stand corrected.

who_ru

If I were you OP, or anybody else thinking of making a massive financial commitment in this country i would read Morgan Kelly's article in today's Irish Times before doing anything...

http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html?via=mr


considering this country has very few options available to it to stimulate growth in our economy, and the fact that we are shackled to the terms of the 'bailout' deal, i certainly wouldn't even contemplate doing anything like borrowing 100,000's of euros.

what i would do is save as much as i can, keep my options open, make sure i have mobility if i need to move to another part of this country for work, or move to another country for work.

the very last thing i would do is place a financial ball and chain around my ankle for years to come. however, each to his/her own ultimately.

okedoke

Thoie wrote: »

Huh - I thought the marginal lending facility (the right hand column) is the one that's of importance to mortgages - for example that's what trackers are based on, but I stand corrected.

Trackers are based on the ECB main refinancing rate

nino1

who_ru wrote: »

If I were you OP, or anybody else thinking of making a massive financial commitment in this country i would read Morgan Kelly's article in today's Irish Times before doing anything...

http://www.irishtimes.com/newspaper/opinion/2011/0507/1224296372123.html?via=mr


considering this country has very few options available to it to stimulate growth in our economy, and the fact that we are shackled to the terms of the 'bailout' deal, i certainly wouldn't even contemplate doing anything like borrowing 100,000's of euros.

what i would do is save as much as i can, keep my options open, make sure i have mobility if i need to move to another part of this country for work, or move to another country for work.

the very last thing i would do is place a financial ball and chain around my ankle for years to come. however, each to his/her own ultimately.

good points, certainly food for thought.
I hate the idea of paying rent, dead money and all that.
Although paying a mortgage on a house who's price is falling is the same thing I guess with all the restrictiopns that come with being tied down etc.

Mr. Loverman

nino1 wrote: »

I hate the idea of paying rent, dead money and all that.

Rent isn't dead money. That's just a phase estate agents invented so people will buy property.

Rent is payment for a service.

You pay for many other services, e.g. you pay for food rather than grow it yourself.

Also, be aware that renting is frequently better value than owning a property with a mortgage.

iguana

nino1 wrote: »

I hate the idea of paying rent, dead money and all that.
Although paying a mortgage on a house who's price is falling is the same thing

It's not really the same things as the odds are that your rent is quite a bit less than the amount the house you will eventually buy has fallen by. I paid €13,500 in rent this year on a house that has dropped in value by about €150,000 in the same time. The "dead money" of rent doesn't even start to compare to the dead money of the current rate of price falls. You can also think of each year you are renting now as several years off the back end of your mortgage.

Look at this hypothetical scenario. Just say interest rates double and house prices half over the next 5 years.

If you borrow €400,000 over 30 years at an IR of 5%, your repayments will be €2168pm.
Or you wait 5 years and..
Borrow €200,000 over 20 years at an IR of 10%, your repayments will be €1957pm.

Wait, save, consider each year renting as 2 years off your mortgage and don't allow your self to be influenced by silly slogans like "rent is dead money."

Chris_5339762

...but bear in mind you are probably paying your landlords mortgage at the moment, so why not pay your own?

Mr. Loverman

Chris_5339762 wrote: »

...but bear in mind you are probably paying your landlords mortgage at the moment, so why not pay your own?

Because it is currently a lot cheaper to rent.

tanyabond

Mr. Loverman wrote: »

Because it is currently a lot cheaper to rent.

it depends on where you rent and what property you are looking at buying...

Mr. Loverman

tanyabond wrote: »

it depends on where you rent and what property you are looking at buying...

In the overwhelmingly vast majority of cases it is cheaper to rent than buy.

Can you show me some examples of where it would make better financial sense to buy?

okedoke

Chris_5339762 wrote: »

...but bear in mind you are probably paying your landlords mortgage at the moment, so why not pay your own?

...your landlord is becoming poorer due to continuing price falls and you, if you intend to buy at some point in the future, are effectively becoming richer if you "pay his mortgage" for a while.

iguana

Chris_5339762 wrote: »

...but bear in mind you are probably paying your landlords mortgage at the moment, so why not pay your own?

The above is what I meant by silly slogans. The maths are right there clear as day but people still revert to sound-bites that don't mean anything any more. I'd have to have paid over 11 times more in repayments (not including interest) to pay as much off a mortgage than the house price falls have saved me this year. Why would I do that, it would be a complete and total waste of money. House price falls are shaving so much off my future mortgage, I'm heading toward a point where I may not need one.

tanyabond

Mr. Loverman wrote: »

In the overwhelmingly vast majority of cases it is cheaper to rent than buy.

Can you show me some examples of where it would make better financial sense to buy?

I'm not familiar with the overwhelmingly vast majority of cases and can only speak for myself. We are currently paying the rent of 650 a month in Midlands and hoping to buy for around 80000 which will make our monthly bill much smaller (even stress-tested)...

Zamboni

tanyabond wrote: »

I'm not familiar with the overwhelmingly vast majority of cases and can only speak for myself. We are currently paying the rent of 650 a month in Midlands and hoping to buy for around 80000 which will make our monthly bill much smaller (even stress-tested)...

Are you just comparing rental payment against mortgage repayment or have you accounted for the variety of additional charges that are attached to property ownership? Management fees/rates, insurance, waste, repairs etc.

tanyabond

Zamboni wrote: »

Are you just comparing rental payment against mortgage repayment or have you accounted for the variety of additional charges that are attached to property ownership? Management fees/rates, insurance, waste, repairs etc.

there'll be no management fees and we do have to pay for waste at the moment anyway and it still leaves plenty of space for repairs. Everyone's situation is different so I'm surprised how some people can just speak for everybody...