Return of mortgage interest at c. 12%+: likely?

gaiscioch

I was speaking with an 80-year-old man last night who had a 40-year banking career and he was claiming that we are in historically low interest rates and that they will rise. He said he was paying @ 18% interest on his mortgage for a time in the 1980s, something I found hard to fathom, but which this US article seems to confirm happened: Why Mortgage Rates Once Reached a Sky-high 18.5%.

This Central Bank report says interest rates reached 16% in the 1980s and 12% in the 1990s.

In a nutshell, how likely is it that interest rates will rise to such levels again, and if they do will this essentially lead to a reduction in house prices as people will be deterred from buying with rates so high? What are the consequences of a rise in interest rates to this magnitude?

mickman

gaiscioch wrote: »

I was speaking with an 80-year-old man last night who had a 40-year banking career and he was claiming that we are in historically low interest rates and that they will rise. He said he was paying @ 18% interest on his mortgage for a time in the 1980s, something I found hard to fathom, but which this US article seems to confirm happened: Why Mortgage Rates Once Reached a Sky-high 18.5%.

This Central Bank report says interest rates reached 16% in the 1980s and 12% in the 1990s.

In a nutshell, how likely is it that interest rates will rise to such levels again, and if they do will this essentially lead to a reduction in house prices as people will be deterred from buying with rates so high? What are the consequences of a rise in interest rates to this magnitude?

Consequences would be well over half of mortgages would default and there would be global financial ruin

Won't happen

on_my_oe

It definitely happened, I remember my parents paying it and it tipped them over.

My OH thinks I'm paranoid but I just have a good memory

Del2005

If it happens it'll be many years from now. Europe is in the doldrums and only now started printing money, the US and UK started years ago and they are still at low interest rates with a small increase due. Interest that high is to try to reduce inflation and the vast majority of the EU is in deflation.

Eric Cartman

were in a state of quantative easing at the moment which prompts inflation , this will be like talking about buying a house for £20,000 in the 80's , the inflation will exceed the interest rates making 18% seem large on paper , but when its 18% on 200k outstanding and inflation has put your wage to 80-90k itll be easy to erode the principal.

jon1981

if they think things are bad now, wait and see the carnage that would ensue if they were to raise the rates that high!

murphaph

It certainly happened. I was clearing out paperwork after my father passed away a few years ago and I found a statement from Irish Nationwide @ 17%. No wonder their original 3k mortgage taken out in 1970 wasn't paid off until the 90s with all that compound interest adding to it. Painful.

Will it happen again in our lifetimes? I suspect Ireland would need to leave the Euro or for the core nations to have left and formed a Euro II for Ireland to see 17% again. If it ever happens it won't be just mortgage holders in the smelly stuff.

jon1981

Eric Cartman wrote: »

were in a state of quantative easing at the moment which prompts inflation , this will be like talking about buying a house for £20,000 in the 80's , the inflation will exceed the interest rates making 18% seem large on paper , but when its 18% on 200k outstanding and inflation has put your wage to 80-90k itll be easy to erode the principal.

Do you mean when inflation has driven average wage to 80-90k?

Eric Cartman

jon1981 wrote: »

Do you mean when inflation has driven average wage to 80-90k?

thats what im getting at yes.

quadrifoglio verde

murphaph wrote: »

It certainly happened. I was clearing out paperwork after my father passed away a few years ago and I found a statement from Irish Nationwide @ 17%. No wonder their original 3k mortgage taken out in 1970 wasn't paid off until the 90s with all that compound interest adding to it. Painful.

Will it happen again in our lifetimes? I suspect Ireland would need to leave the Euro or for the core nations to have left and formed a Euro II for Ireland to see 17% again. If it ever happens it won't be just mortgage holders in the smelly stuff.

My mam found a water charges Bill recently from 92 when we sold our house, the water charges were 200 odd pounds. Makes today's sound cheap.

While I can't see rates going massively high I can see an increase of 2-3% in the next 3-5 years. Let's face it they ain't going any lower, and won't stay at current rates for an eternity.

loyatemu

its unlikely - we had a volatile minor currency in those days; the punt was devalued on a number of occasions. The Euro, despite it's problems is unlikely see interests that high... (I hope).

ABajaninCork

Oh yes. It happened all right...

I was paying 17% in the UK, in the late 80's. Scary, scary times. So many of my friends just handed in their keys. I can remember paying £700 mortgage from my £900 salary. Couldn't even buy a pair of tights! I had to take a second job working in retail weekends, just to make ends meet. At one point I was working 7 days.

Had some laughs too. Used to take it in turns to phone a mate who was in the same position as me. If we went to each other's houses, we used to buy a pack of 10 fags. 5 for me, 5 for her!

Woshy

My Dad also remembers it well, paying crazy interest in the eighties, he also says he was taxed to the hilt as well. He has spreadsheets dating back years with his monthly budget in them and he can't believe how much of his income went on the mortgage. They just tightened their belts and got through it though, and are very comfortable these days.

God only knows what would happen if interest rates got that high again!

mickman

Japan has had low interest rates for the past 20 plus years - we won't see them high in our lifetime

The_Conductor

It was immediately before our break with sterling in the 1980s.
Our economic policies (notably the election that the 1979 government bought- alongside subsequent government interventions) destroyed the value of the Irish pound- and the 18% interest rate was necessary to preserve the link with sterling. Only after we formally abandoned the ruinous link with sterling did interest rates normalise (still at 7-8-9%- levels which we then considered to be 'normal').

Unfortunately our history of government interventions in the economy has been particularly awful in an Irish context- many of which will most probably never be publicly released- but are common knowledge among civil servants even today.

L'prof

They're high enough now as it is at 4-4.5% with trackers at a paltry 1%

The_Conductor

L'prof wrote: »

They're high enough now as it is at 4-4.5% with trackers at a paltry 1%

'Normalisation' of interest rates- would infer an ECB overnight rate of 4-4.5%- with mortgage interest rates of 1.5-2% above this (depending on LTVs etc). Obviously rates like these are ludicrous in the current context. It could be a decade- or even longer- before we get to 'normalisation'........

Current Irish variable rates- are among the highest rates in the EU.
We need to fundamentally reassess how mortgages are structured in this country- in comparison to the rest of the EU- notably the manner in which it is normal throughout most of the EU to fix rates for the entire term of the mortgage- and to securitise the loans, so there is still a reasonable margin for the lending institute.

The Irish market- regardless of what the Central Bank, the Regulator or anyone else says- is still the 'wild west'- and the interests of the lenders are foremost addressed- and those of consumers, are at the back of the queue. This attitude needs a fundamental sea change.

murphaph

There are other "mechanical" differences in the way the debt is secured. We have an appointment next week with the notary to order a lien to be added to our site in favour of the bank. This is not a mortgage. The lien does not decrease as the home loan is repaid. At the end of the 20 years or whatever the lien still stands at the initial amount. You then request the lien to be extinguished and the bank obliges (in fact many people just leave the lien in place, in case they want to get a loan again based on their equity, only extinguishing the lien in the event of a sale of the property)

This mechanism (a Grundschuld) is the preferred way of doing things in Germany since the 70's. Before then it was the typical mortgage, which is legally a much more complex instrument and therefore costs more to arrange. The other advantage of the "new" way is that you can easily top up your loan without needing to involve a notary/solicitor, because the bank already has a lien that covers the amount.

We need app. 270k but we will order a lien of 300k, just in case we have some unexpected costs during the build (we're building a cellar in an area of high groundwater, so this could cost 10k extra, worst case scenario).

AFAIK this is very much a German thing and elsewhere in continental Europe the traditional mortgage is still typical.

Geuze

gaiscioch wrote: »

I was speaking with an 80-year-old man last night who had a 40-year banking career and he was claiming that we are in historically low interest rates and that they will rise. He said he was paying @ 18% interest on his mortgage for a time in the 1980s, something I found hard to fathom, but which this US article seems to confirm happened: Why Mortgage Rates Once Reached a Sky-high 18.5%.

This Central Bank report says interest rates reached 16% in the 1980s and 12% in the 1990s.

In a nutshell, how likely is it that interest rates will rise to such levels again, and if they do will this essentially lead to a reduction in house prices as people will be deterred from buying with rates so high? What are the consequences of a rise in interest rates to this magnitude?

As central banks won't allow inflation to return to the 10%+ rates of the 1970s-80s, then nominal interest rates will not rise to 10%-15% or anything like it.

Interest rates will rise, to maybe 3-5%.

jmayo

gaiscioch wrote: »

I was speaking with an 80-year-old man last night who had a 40-year banking career and he was claiming that we are in historically low interest rates and that they will rise. He said he was paying @ 18% interest on his mortgage for a time in the 1980s, something I found hard to fathom, but which this US article seems to confirm happened: Why Mortgage Rates Once Reached a Sky-high 18.5%.

Can I ask why you doubted him so much you had to look up articles to prove his point ?
Is it because he is old ?
Sorry to be having a go, but the phrasing of this part of your post appears to me as damm condescending to the old gentleman.

gaiscioch wrote: »

In a nutshell, how likely is it that interest rates will rise to such levels again, and if they do will this essentially lead to a reduction in house prices as people will be deterred from buying with rates so high? What are the consequences of a rise in interest rates to this magnitude?

And yes he is right interest rates are at low rates.
They will probably rise, but probably due to fact we are now in Euroland we shouldn't see such high rates as those we had in the 70s/80s.

The_Conductor wrote: »

It was immediately before our break with sterling in the 1980s.
Our economic policies (notably the election that the 1979 government bought- alongside subsequent government interventions) destroyed the value of the Irish pound- and the 18% interest rate was necessary to preserve the link with sterling. Only after we formally abandoned the ruinous link with sterling did interest rates normalise (still at 7-8-9%- levels which we then considered to be 'normal').

I presume you mean lynch's 77 election auction.
We broke with Sterling in 79, but interest rates stayed up around 12% or more until 93/94.
I think some of that had something to do with fact the country was actually finally growing for once and GDP had bene expanding at over 5 % per annum for 5/6 years.

The_Conductor wrote: »

Unfortunately our history of government interventions in the economy has been particularly awful in an Irish context- many of which will most probably never be publicly released- but are common knowledge among civil servants even today.

We should be thankful we have outside overview at the moment.
Even then the governments are often doing their best to make a pigs ear out of it.

mickman

jmayo wrote: »

Can I ask why you doubted him so much you had to look up articles to prove his point ?
Is it because he is old ?
Sorry to be having a go, but the phrasing of this part of your post appears to me as damm condescending to the old gentleman.

There was no reference to that at all, how can you read into something so ridiculously

jmayo

mickman wrote: »

jmayo wrote: »

Can I ask why you doubted him so much you had to look up articles to prove his point ?
Is it because he is old ?
Sorry to be having a go, but the phrasing of this part of your post appears to me as damm condescending to the old gentleman.

There was no reference to that at all, how can you read into something so ridiculously

Just my take on it, but the poster admitted they found it hard to fathom.
They then highlight link to US article that in theior own words "seems to confirm happened".

Basically the poster appears to have doubted it happened until they found corroborating evidence on the web.
IMHO it reads as if they thought the old guy was deluded or some such.

Maybe it is youth not realising things happened, some good and a lot bad, before they ever were heard of or before they began an interest in something.

Maybe it is me being getting old and cranky and not liking people who think anything from the 80s is a golden oldie.

Carawaystick

I can remember radio ads for "10 and a half percent" interest on deposit, and Im under 40. I imagine loan rates were easily higher

Barely Hedged

Geuze wrote: »

As central banks won't allow inflation to return to the 10%+ rates of the 1970s-80s, then nominal interest rates will not rise to 10%-15% or anything like it.

Interest rates will rise, to maybe 3-5%.

Who would have thunk that negative interest rates would have been a possibility 6/7 years ago. Options on rates as low as -2% to -2.5% are being requested and quoted on. I wouldnt be so sure with that comment

the groutch

ABajaninCork wrote: »

Oh yes. It happened all right...

I was paying 17% in the UK, in the late 80's. Scary, scary times. So many of my friends just handed in their keys. I can remember paying £700 mortgage from my £900 salary. Couldn't even buy a pair of tights! I had to take a second job working in retail weekends, just to make ends meet. At one point I was working 7 days.

Had some laughs too. Used to take it in turns to phone a mate who was in the same position as me. If we went to each other's houses, we used to buy a pack of 10 fags. 5 for me, 5 for her!

yeah, you definitely had your priorities straight back then.

One_Of_Shanks

the groutch wrote: »

yeah, you definitely had your priorities straight back then.

Why the snide comment? Quite enjoyed the post you're having a go at, personally.

ABajaninCork

the groutch wrote: »

yeah, you definitely had your priorities straight back then.

Yup. That's why I held on to my property, and others lost theirs if you bothered to read and understand what I wrote.

Now go away and find something else to do...

The_Conductor

Guys- attack the post- and not the poster. Your one and only warning.......

Villa05

jmayo wrote:

Can I ask why you doubted him so much you had to look up articles to prove his point ? Is it because he is old ? Sorry to be having a go, but the phrasing of this part of your post appears to me as damm condescending to the old gentleman.

Not aimed personally at any poster, but many people seem to have forgotten that we had a property bubble quiet recently and how much of a disaster that was for the country.

Maybe if people studied what happened in the past we would be less likely to repeat the same mistakes over and over again.

gaius c

Does anyone remember WHY interest rates went to that level?

Stagflation: inflation but with no growth caused by a previous loading up on debt that couldn't be serviced.

Does the underlined bit sound familiar?

jmayo

gaius c wrote: »

Does anyone remember WHY interest rates went to that level?

Stagflation: inflation but with no growth caused by a previous loading up on debt that couldn't be serviced.

Does the underlined bit sound familiar?

Some of the late 70s/early 80s recession and stagflation had to do with the 73 oil crisis and in the US's case, the 79 energy shock in the US.
And guess what both of those were down to Middle East conflicts.
Sound familar ?

Added to that the likes of the UK had terrible industrial unrest for decades and it had lost it's once massive industrial base.

People should also note how the likes of reagan and thatcher came to power due to the economics of the time.

Then some of their policies set the seeds for the boom busts that were to follow.
In fact some people (Nigel Lawson being one) attribute things like the 1986 LSE Big Bang to contributing to the financial meltdown in 2007/2008.