More Interest Rate Shocks

Apparently, traders are referring to Liz Truss as “Daggers”, as in Dagenham, which is two stops after Barking.  It’s also rumoured that there have been letters of no confidence submitted against Truss who is less than a month into her spell as Prime Minister.  We used to joke about being two Leeds managers away from Christmas, but it seems we can amend the joke now as the UK faces further chaos and embarrassment.  What prompted all this, though?

The new-look government announced a “mini-budget” on 23/09 which led to the collapse of the £ against the $.  This is bad for our economy as we import a lot of stuff paid for in $.  If the £ can’t buy as many $ then we get less bang for our buck, so to speak.  It seems that not a month goes by without me pointing at something the Tory government has done, whilst shouting, “look, I told you they’re evil” but it seems the louder I shout, the less people listen.  

Time for a little detour… Imagine you are back at school and getting ready to sit an important exam.  You have a general idea of what to expect, but nothing more.  You study hard and achieve a decent mark.  However, one of your fellow students (who happens to be the son of the head teacher’s best friend) nailed the exam and got 100%.  Due to hitting such a high mark, this student received a bursary of £2,000 which doesn’t have to be paid back.  You later hear rumours that the head teacher leaked the exam questions to their friend, who in turn passed them to their son.  This is a messed-up situation, I’m sure you’d agree.  

Let’s look at another situation.  The Chancellor of the Exchequer is creating a new budget for the UK.  There are some concerns that the policies contained in this budget will result in the £ crashing.  There are rumours that the policies set out in the budget have been leaked, and that high-rolling traders, dealers, and investors are aware that the £ is likely to crash.  There is a flurry of activity where hedge funds short the £ (meaning they bet on the £ losing value).  Why aren’t more people absolutely raging about this?

In addition to the £ falling in value, and the stock market taking a hit, interest rates on mortgages are also being impacted.  There’s been a series of news reports suggesting hundreds of mortgage deals have been removed from the market.  There’s also talk of an emergency meeting of the MPC to raise interest rates again, before the next scheduled meeting.  Some have suggested the base rate could exceed 4% by the end of 2022, and 6% by next summer.  Should increases happen along these lines, then the UK risks an economic crisis the likes of which we’ve not seen for a long, long time.

This is what my residential mortgage looks like:

I always knew that low rates would not stick around forever, but even I had not expected the Tories to fuck the country so hard that we’d see rates go this high, this soon. Initially, I thought that the best way to tackle my mortgage would be to increase our payments to bring the balance down faster. However, on reflection, I think it’s best to do the opposite.

My plan now is to extend the mortgage term as far out as possible, which will bring the monthly payment down. Once this completes, I can then make overpayments that target specific parts of the mortgage. Using the avalanche method of debt repayment, I’d assign the overpayment to whichever part of the mortgage is going to increase first, and then the next one, and so on.

My thoughts are to tackle sub-account 9 first, then sub-account 10. The scary thing is the bulk of the mortgage that sits on 0.81% at the moment. When my various rates come to an end, the reversionary variable rate is now 5.74%. Assuming the whole mortgage reverted to this rate, our payments would more than double. Yes, we can look for a new deal at that time, and fixed rates are generally lower than the reversionary rate, but if rates continue to increase we could be faced with fixed rates that are higher than the current reversionary rate.

Once we’ve cleared 9 and 10, I’m thinking it might be best to start paying down the smaller sub-accounts so that the mortgage looks a little, well, cleaner.

What can you do?

My plans and thoughts are just that; mine. I have no idea what your circumstances are, or how you feel about financial risk. Whether you are concerned or not, I would strongly advise you to take some time to look through your mortgage. Familiarise yourself with how it is set up, and when your rates are likely to change. Speak with your lender, or a qualified mortgage professional, who can go through your mortgage, finances, and personal circumstances. The key thing is to be proactive, and not reactive. If you wait to see what happens with the market and interest rates in the news, it’s already too late as rates will have increased.

In times such as these, it’s important to remember that this climate of economic mismanagement will not last forever. Eventually, things will get better; it’s just part of the cycle of boom and bust. I suspect the government will have no choice but to scale back their economic policy, which will probably bring this government down. Several international organisations, such as the IMF, have criticised the actions of this government. This is huge news, and I think we’ll start to see some backtracking from Truss and Kwarteng in days, rather than weeks.

As always, keep calm and assess your own situation. Don’t make rash decisions that can’t be undone. Speak with your lender about your mortgage. Take stock of your finances, and perhaps most importantly, don’t bottle up your stress, fear, and worry.

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5 thoughts on “More Interest Rate Shocks

  1. I’ve not read beyond the first paragraph to be fair as really busy in the office, but I think to suggest the mini budget ‘collapsed’ the £ is sensationalist. The £ lost 4p against the $ and has since recovered 3p.

    Much of the problem is the strength of the $ and that’s as a result of a very aggressive increase in interest rates by the US (2.25% in 3 months) which has been done to target inflation (and is set to continue). This has had knock on effects all over the world, especially on commodities traded in $’s like oil.

    Interest rates need to rise here too. They’ve been artificially low for far too long and everybody’s had a great time, particularly property investors (who’ve not shown much in the way of solidarity with tenants).

    There is a huge rebalancing of financial markets going on driven largely by the COVID hangover. I’m not saying the Govt have it right as it’s fast too early to suggest that.

    But it’s also far too early to suggest it’s a disaster too.


    1. A lot of things have contributed to the pound falling in value against the dollar. Some of it is down to the relative strength of the dollar, whilst some of it is down to this clusterfuck of a government. I didn’t mean to imply that the mini-budget is wholly responsible for the decline of the pound against the dollar, but it has had an impact. Further on in the post I explain that hedge funds made a killing on this, even if the pound bounced back. It all just seems very murky. Also, the pound’s ability to buy dollars has been reducing, more or less consistently for many years now. A lot of things contribute to this, but I’d wager much of the damage is down to, yes, this clusterfuck of a government. A 3p increase doesn’t seem that great when in 2012 you could get roughly $1.76 for a £1.

      It’s interest rates that will be the killer; they have to go up, but in doing so it’s going to put a lot of people under incredible mental strain as they can’t afford their mortgage payments. People should have been prepared, but sadly many people chose to max out the amount they could borrow, to get the biggest/best home with little/no consideration to future rate rises. Not to blow my own trumpet but I saw it coming a year ago, and I moved off a tracker (at the time my rate was 0.1%) to a fixed rate of 0.81%. Many people said I was crazy. A few months on and the base rate was higher than my fixed rate. It’s not rocket science, or precognition; it’s balancing risk in the context of current events.

      When the dust settles, I suspect we will see an immense transfer of wealth from the working class to the upper class because that’s what every economic disaster leads to. Those with cash can snap up assets at an artificially low price when the panic selling starts.

      Liked by 1 person

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