Coming to a bank near you: the 9% mortgage

These days, if you are holding out for cheaper fixed mortgage deals, you should have a few more years before stepping into one. Lord Turner, chairman of the Financial Services Authority, has shown us just how long a waiting game it could be, according to a comparison of a few banks.

The expectancies certainly don’t look positive for people who are looking for a mortgage loan. The rates can stay high for an other six to nine years after the onset of a banking crisis.

To keep banks as Northern Rock, Bank of Scotland,… from repeating their failures, they should hold much more capital, according to Lord Turner.

Of course, this will not solve all the current liquidity problems, because holding more capital will automatically increase the banks’ costs, which will get passed on to the clients eventually, in a form of a wider spread between the rates paid on our savings, and the rates charged on our debts.

The mortgage market has been doing so bad recently, there is a real chance that the rate of the 9% mortgage may not be far off.

With the rather poor bank rates of just 0.5%, it’s not looking good for us customers, and especially not for the banks. Just imagine if their interest rates were back at a “normal” level of about 4%, that would mean suicide for most banks.

With the country being set to fall into deflation, it’s rather out of the question to be thinking about higher interest rates, but that’s not quite the case, the rates could be closer than we think they are.

Although these are some really rough times, investors are not predicting a lower global growth over the next year, largely thanks to renewed optimism about China. A lot of people see many opportunities in the development of their economic.

Also in this part of the globe, this seem to be getting better step by step. Last week we saw a stronger growth than we’re used to nowadays. Oil soared 7% in just one day, while copper surged to a four month high.

So we’re all wondering if we should be locking into a fix now to protect ourselves from these big tracker margins. Melanie Bien, from Savills, definitely thinks so, but certainly not for 2 years. You should play it safe and have one for 5 years.

On the other hand, if you decide to play the waiting game on a tracker, and house prices fall even further, you may find you don’t have enough equity when you try to switch to a fix in a year or so.

Although we are seeing some important signs of a recovery on the markets, mortgage lending’s don’t seem to be getting any profit of it. With mortgage lending’s that are about to reach a 9% rate, you may want to play the waiting game for another period.

If there’s no other way, Melanie Bien at Savills would recommend you to step into a 5 year fix now to protect yourself from what’s coming. This may be the best advice you can take, according to me, due to the expectations of Lord Turner, who said the mortgage rates could stay high for six to nine years after the onset of this crisis.

I don’t think that banks holding more capital isn’t the best solution. It is a long term solution, but we need things to be handled right now. If they eventually hold more capital, it will cost the bank more money, which will eventually cost us more money. That way, we’re not getting any closer of putting this period behind us.

But we all seem to be keeping our heads up. While the crisis continuous here, there’s a lot going on in China, which looks like a whole new era for investors as they see a lot of opportunities there. That way they’re kept from getting depressed on thinking about how things are going to end up here.

Source: http://www.timesonline.co.uk/tol/money/investment/article5949354.ece
Written by
Tom Baeyens
Student at Artevelde College
2FI2