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Comment by kypro | Hacker News Reader

So the bigger news here imo is what's happening in the bond market. It's now expected that the BoE will increase rates above 6% by the middle of next year.

Most people in the UK are on fixed rate mortgages, most of which are 2-3 year fixes. Those who brought a home during the pandemic or fixed at a low rate typically fixed at around 1-2%. I personally fixed for 2 years at a rate of 1.7% just over a year a go when I moved house. Next year I'm likely going to need to fix at 7%. This will take my monthly payments from around £1300 to around £2600. I budgeted very conservatively when taking out my mortgage (at least I thought I did) stress testing my current finances to a rate of 5% - which was actually above my lenders standard variable rate at the time. Obviously with energy bills and the cost of living crisis my previous assumptions were already wonky, but rates going up this fast was something I would have never of predicted. I believe this is actually the fastest rise in rates ever. I don't have time to save to pay down my mortgage loan so I guess now I'm screwed lol.

I'm reading online that I was stupid for buying a house in a bubble and that rates need to go up and house prices need to fall. I do understand this is my fault, but it sucks because I've also let my family down big time by deciding to buy a house. I'm not sure of the exact numbers, but I believe around 500,000 people are in a similar position to me.

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I'm pretty sure this would be called an Adjustable Rate Mortgage (ARM) in the US. You aren't stupid; ARMs are sold heavily during "good times" and to be frank, to my knowledge, most of your country uses what we call ARMs without issue.

Having lived through, and lost all my shit, in the last financial crisis as a young man I'd also like to say something more directly to you. You did not let your family down. You thought you were making a good financial decision to help secure their future. Nobody, no matter what they tell you, can say they can predict bubbles. More aptly put, your nations economics, and predictions thereof, do not rest on your shoulders.

The governments of the world will have to step in. Pay attention to government run programs to protect you during a recession. If you do default or get foreclosed on keep all of your records. I fled real life and joined the military after defaulting on my debts. In my last year of service I challenged the total of my debt as reported by creditors and won because they couldn't prove custody or the amounts.

There's a long wind between "oh shit, things look they can be bad" and "oh shit, I'm fucked". Don't jump on the latter outlook just yet, try to ride this out and look for opportunities that will help you safely navigate these times.

Thanks. I can't tell you how much comments like this mean right now. It's nice knowing someone can relate. I'm sure you also had your fair share of people telling you how stupid you were for taking out an ARM.

But yes, ARMs are basically the entire UK market. We don't have long-term fixes like in the US. The longest fix we have here is 10 years and they're quite rare. Overwhelmingly borrowers go with 2, 3 or 5 year fixes. I believe the US is a huge outlier in that the majority of your mortgages since the GFC have been 30 year fixes.

Things are very bad right now, but I'm still exploring options. It's possible at this point that we might still get through this if we're extremely careful with money (as in beans and rice every day for the next two years) and rates don't go any higher. It also assumes I don't lose my job which is at risk because of the recession. I'd like to say it's 50/50, but realistically there's probably a 20-30% chance I'll be okay at this point which isn't ideal, but it's still a hand worth playing.

I would bet against the government stepping in because here in the UK you have renters who hate homeowners, and boomers who typically own there homes outright and therefore tend to blame people struggling with mortgages because in their day rates were 10% (obviously this is never adjusted for affordability, but still). Either way there is close to zero political incentive to help millennials who brough homes in the last two years. Nor is there any precedent to helping home owners in my position. Our new PM is also a bit of a Thatcherite and may actually be trying to raise rates with her economic policies which I think is part of the recent the market is reacting as it is.

Honestly I doubt there's really a way out if things go against me any more. I'll have to declare bankruptcy and take it from there I suppose. I'm trying to stay strong, but I don't deal with stuff like this well. I don't even know if I want to deal with it. There's no reward at the end, it's just more suffering.

Can’t you just sell now before markets adjust or are you underwater already? The sooner you accept the loss and bail the more likely you are to come out in one piece.

It's something we're thinking about. It's difficult though because we're in the middle of redecorating so the house isn't really in a sellable state right now. Plus selling now out of fear that rates or house prices might continue to move against us and rebuying later would guarantee a loss that might not be necessary at this point.

Generally selling your home every time you fear that rates and house prices might move against you isn't a good idea. I mean you could have argued the same thing earlier this year when rates started to move up, so where you set the limit is hard to know. That's just the risk of homeownership I suppose. Unless you're in a very fortunate financial position for the first few years you just need to hope the market doesn't move against you enough that you become a forced seller.

I still think our best bet at this point is to just hope that this move in rates is temporary or that we'll just about manage through if they stay where they are right now. My plan at the moment is to see how things play out over the next couple of weeks. If rates continue to move higher over the next several days then, yes, I think we'll probably need to sell. But realistically it might already be too late. Given the panic right now realistically we may not be able to sell our house in this environment and in the state our house is currently in. Most lenders have withdrawn all mortgage deals because of what's happening in markets.

The thing people are not talking about yet is that it's not just mortgage borrowers at risk here, it would be very hard for rates to go much higher without it bankrupting the UK economy. Government borrowing costs are going through the roof right now so realistically higher rates would present a systemic economic threat when public debt is this high. The government themselves simply couldn't afford rates going to say 10%. The only way out if rates go much higher is massive currency devaluation which would be good thing for borrowers.

But that's just the rational part of my head thinking about this situation. The problem is this was caused by extremely naive fiscal policy that the markets are now punishing. Assuming the government is a rational actor isn't a bet I really want to take. Especially when the current tory leadership seems to be ideologically in favour of higher rates and lower taxes which simply can't work right now.

Currency devaluation is going to kill your (maybe literally). If you are getting paid in British pounds everything is going to go up extremely. So fuel, groceries etc will go up, and then interest rates will have to follow because there is an expectation of further devaluation that interest rates have to account for.

I realize selling now and taking a huge loss is not something that seems feasible but it’s worth trying to understand what adverse scenarios look like. If you truly can’t pay and the house gets reposesed what is the process? What are the consequences? Can you delay it for long enough that the system gets bogged down with other people getting foreclosed before you? Try to think of this like you are a corporate CEO. You need to position yourself into such a scenario that you limit your losses if things go against you and know when you walk away.

"The governments of the world will have to step in." No, they won't. It's irresponsible to think the government is going to bail you out of some predicament. It's not stupid or foolish to be caught in some financial trap, but it should not happen twice and it should not happen to those you care about in latter years. Financial literacy is a precious skill, and one that we should all work on constantly.

I don't mean for that to seem harsh, but it's just wrong to expect government help all the time. Especially for a readership on Hacker News, we should be pitching financial literacy.

The UK government has a history of propping up the housing market, so given that context it makes sense.

> I'm reading online that I was stupid for buying a house in a bubble and that rates need to go up and house prices need to fall.

Everyone looks "stupid" afterwards when something "everyone knew would happen" actually happens. The problem is that NO MATTER WHAT, there's someone who predicted this exact case and everyone forgets that wider consensus, etc was the other way moments ago. Even the "inflation is going to explode" people thought this was going to happen 2+ years ago (like myself) so it's easy to be right eventually.

> I do understand this is my fault, but it sucks because I've also let my family down big time by deciding to buy a house.

Cut that out. You haven't.

Tell your closest family members your concerns. They're not as close to the specifics and may have different perspective or at minimum can help you emotionally. Try to get help now - even if it's just moral, not financial - before things get ugly.

You could look at the other side of things - following on from remembering how high interest rates had been, when I bought my house 20 years ago, I fixed for 5, then 10 years and am currently in the middle of a second 10-year fixed rate of around 3.5% - it was previously around 5%.

I've been paying 'over the odds' if you look at how interest rates have since turned out, as you mention most people paying around 1.5->1.7% for many years, and so I've often seen myself as 'losing out'.

However, I fixed the rate to ensure I had a known amount of expenses that I could afford.

Neither is 'stupid' - they just have different volatility and risk.

The mistake I made was dramatically underestimating the volatility. I always understood rates could move up, but if they were going to have trended up to 5% in 10 years then that wouldn't be such a big problem because wages would have moved up by then and I would be able to slowly pay down the mortgage to keep repayments the same. Plus I could also afford 5% rates.

The issue with fixes is that you pay a premium for fixing longer term and you also risk interest rates being lower going forward than you fixed for. A lot of the fixes also have early repayment charges and the longer-term fixes can have very large early repayment charges (5%+). This introduces a new risk because if you need to sell your house for some reason during that fixed period you would have to pay a large fee just to exit the deal which isn't great if you've only just brought your house and don't have much equity to fall back on.

So given this I was fine with taking something closer to a market price on the assumption that rates wouldn't sky rocket over the course of the next couple of years. That why I'd have the ability to get out of my mortgage if I ever needed to.

> Neither is 'stupid' - they just have different volatility and risk.

I agree. What upsets me a little is that I don't think I was making a reckless move. We've been thinking about moving away from the city for some time so a longer-term fix was quite risky for us, although if you're sure you're going to stay in your house for 10+ years that's obviously the way to go if you want to reduce the risk of rate rises.

I believe in the US there is no early repayment charge on mortgage in which case it probably always makes most sense to take a longer-term fix.

> The issue with fixes is that you pay a premium for fixing longer term and you also risk interest rates being lower going forward than you fixed for.

this is the essence of the interest rate swap (which is what you're actually buying when you "fix")

the person on the other side of the transaction is betting that the rates will rise, and you're betting that they won't

> A lot of the fixes also have early repayment charges and the longer-term fixes can have very large early repayment charges (5%+).

this is the fee for exiting the swap early, which has to exist otherwise person who bought the other side would never be able to make a profit on it (and hence no-one would ever write one)

Yes, exactly. Fixed rates are basically insurance policies. When rates are rising rapidly like they are to day longer-term fixes seem obvious, almost free money. But the majority of the time they work against you because you're betting against a market that probably knows more than you as a retail mortgage borrower.

That's not to say fix deals are always bad, it really just depends on circumstances. There's no free lunch here and those suggesting everyone should be taking 10 year fixes (where they're available) are suffering from recency bias. There's now a huge risk that those taking 10 year fixes will be locked into much higher rates should they come down over the next few years, which is very possible.

That's just the UK market though. I believe in the US long-term fix rates make much more sense because you can refinance without incurring fees so if rates do drop you can just refinance.

House prices in the UK have been rising continuously for how many decades? And have doubled how many times in that time? I don’t think anyone would have predicted the next PM would be about as bright as used coffee grounds but, that’s what happens when you cough up the dregs of the Tory party and give it power.

This isn't a UK specific thing. House prices have trended up with affordability in all developed countries as interest rates have moved lower over the last several decades. While it was always reasonable to assume rates could trend higher in years to come, given the deflationary effects of demographics in Western countries, globalisation and automation, I think a lot of people would have believed a path similar to that of Japan was more likely over the coming decades.

Also if had brought my house several decades ago I'm sure I wouldn't be in this position right now. It's lose, lose for my generation. You either rent at stupid prices and own nothing, or you take a gamble and buy a house. I understand why people blame me for this, I just don't know what more I could have done. I didn't buy a house at the limits of my affordability unlike some do (and are basically forced to do). I'm also quite well read on financial markets so for me to make this mistake I think probably says something about how easy such a mistake was to make.

Hindsight is 20/20. No one knows what the future holds for sure, so don’t be too hard on yourself.

I like to take a stoic approach to my decision making when I’m in a situation like yours. If you need to sell your house and move into a flat for a few years before you repurchase a house, no big deal. As long as you’re trying your best, I’m quite confident that someone like you can give your family what they need. That’s all that matters.

> I'm reading online that I was stupid for buying a house in a bubble and that rates need to go up and house prices need to fall.

I don't think you're stupid. You couldn't have foreseen the sequence of events that has produced this situation. For what it's worth I did a very similar stress test, with similar assumptions, when I bought my home. I feel like this volatility is something of a rude awakening for our generation.

What does the 500,000 figure represent? There will be many people whose fixed-term mortgage rates expire in a now much higher-rate environment, including those on longer-term fixes negotiated before the pandemic.

> I don't think you're stupid. You couldn't have foreseen the sequence of events that has produced this situation. For what it's worth I did a very similar stress test, with similar assumptions, when I bought my home. I feel like this volatility is something of a rude awakening for our generation.

Thanks man. At the end of the day a mortgage is always a risk and you can only be so conservative with your expectations. People have been predicting rates will move up for years, but I'm not sure anyone predicted rates would move up 6% in a year and a half even if in theory it was possible.

> What does the 500,000 figure represent? There will be many people whose fixed-term mortgage rates expire in a now much higher-rate environment, including those on longer-term fixes negotiated before the pandemic.

There's a lot of people who will need to fix at a higher rate in the coming years, but most I suspect are at little risk. If you owned your home for 10 years you've already paid down a lot of the mortgage and you were probably used to modestly higher rates anyway.

Here's a chart: https://pbs.twimg.com/media/FdlyDZhWAAI95pl?format=jpg&name=...

Where the risk would be is new buyers with a high percentage of debt / equity who brought over the last couple of years who now need to move to a much higher rate. I believe that number is around 500,000, but I've not seen an exact figure for that. It's somewhere around that though from the numbers I've seen.

Higher mortgage rates generally obviously aren't great for anyone though. Even if you can afford it your mortgage payments going up it will still mean you have less to spend elsewhere.

>I'm reading online that I was stupid for buying a house in a bubble and that rates need to go up and house prices need to fall.

Would you rather have perpetually increasing housing prices?

Wouldn’t that be even worse for your younger and future family members?

I don’t think you’re stupid, but this does seem like shortsighted thinking.

(I do hope you manage to get through this as unscathed as possible)

> Would you rather have perpetually increasing housing prices?

Well that's the problem. What do you do? Rent and wait for a crash that might never happen or just buy and hope it works out? Both are a huge risk. Those who waited in recent years now have to buy at much much higher prices.

> Wouldn’t that be even worse for your younger and future family members?

I want rates to rise and for housing affordability to come down. I even planned for that. What I didn't expect was for rates to rise 6% in a year or for there to potentially be a housing crash so soon after I brought. My house not decreasing in value with a slow increase in rates would have been fine.

> I don’t think you’re stupid, but this does seem like shortsighted thinking.

Yeah, perhaps. I just wish everyone who knew this was going to happen was around a couple of years ago to talk me out of it. Honestly it seemed like everyone was of the opinion that buying a house was generally a good financial decision until a few months ago. Now everyone is telling I made a stupid decision and should have rented. I don't know what to think anymore.

I did try to calculate affordability under reasonable circumstances. Most people two years ago would have recommended checking that you could afford interest rates to normalise to 5%. I could (with a bit of a buffer) and if they were to go higher over say 5 years that would have been fine because I would have time to pay down my mortgage and hopefully would be making more by then. What I didn't account for was the huge increase in energy bills, cost of living plus interest rates going above 6% in a year. I know I should of and apparently people did, but I'm still not clear how I was meant to predict the largest affordability crisis in UK history.

Not making excuses though, I feel upset and annoyed at the timing. But ultimately I just feel like a failure for letting everyone who relies on me down, and that's my doing.

Hope this doesn't come off as me making excuses, I'm just trying to explain my perspective. I wasn't trying to gamble on house prices going up or knowingly making a risky bet as a lot of people have been suggesting to me recently. I was just trying to buy a house for my family.

The same thing is going to happen to commercial real estate loans. In general any risky investment which was financed with low short term rates is going to see its cost of borrowing jacked up enormously and will cause failures and bankruptcies.

It's unfortunate that "fixed" doesn't mean what it does with US mortgages. Here, a fixed rate mortgage is fixed for the life of the mortgage, typically 30 years or at 15 if you opt for a higher payment.

What you're describing is known here as an ARM (Adjustable Rate Mortgage) and they are a very scary thing because you never know for sure what the macro economic situation will look like.

> ... do understand this is my fault, but it sucks because I've also let my family down big time by deciding to buy a house. I'm not sure of the exact numbers, but I believe around 500,000 people are in a similar position to me.

The political consequences should not be underestimated. Parent is actually taking responsibility, something I doubt many in the same position will. There will be scapegoats.

> 500,000 people are in a similar position to me.

Do not despair; watch for hints of a coming bailout. Bankrupting half a million voters has to look like poison to elected officials.

One more economically rational option in future, for example, would be imposing a principal "haircut" on lenders, down to some assessment of the by that time reduced market prices of comparable homes.

I would be astounded if the current zeitgeist allowed that. Historically that has been a non starter too.

I wouldn’t count on it – didn’t happen last time round

> I believe this is actually the fastest rise in rates ever.

Why do you believe that?

https://www.propertyinvestmentproject.co.uk/property-statist...

Mortgage rates I mean. The base rate is still far behind the curve. Mortgage rates move with market expectations and those have skyrocketed over the last 6 months. Base rates haven't kept up with recent moves. I believe you could still get mortgages for under 2% at the start of the year. After this move in markets mortgages under 5% are unlikely.

Also, none of these stats ever adjust for affordability. People like to cite rates in the 70s but forget that people borrowed much less on their homes back then so the impact of rate moves wasn't so extreme. When adjusted for affordability this is without a doubt the largest move ever. You have to consider that first time buyers today frequently take out mortgages with just a 5% deposit, and often use all of their savings to do so. They have no buffer.

The sad thing about all of this is that I'm probably in a relatively good position compared to most buyers given I have some savings and didn't take out a 95% debt/equity mortgage.

I still take issue with the idea that a rise of 3% is unprecedented. I speak as someone who purchased my first property right before the ERM crisis and saw my mortgage payment almost double.

Also, for a long time, 100% and even 105% mortgages were common. I remember that when property prices nose-dived, we had people on TV being interviewed and complaining that they were "now in negative equity" as though that were something that had been done to them. These people started in negative equity by taking out a loan for more than the value of the property at the time of purchase.

With all that said, you're 100% correct that higher rates are going to cause real pain now, just as it did then. I don't accept that it's going to cause unprecedented pain, because to do so is to dismiss the very real problems that many many people had back then.

PS. Your strongest "unprecedented" argument would have been that the percentage increase in rates is bigger than ever before. 5% is 250% of 2%, whereas 15% is "only" 200% of 7.5%. But then it's easy to grow hugely when starting from a very small baseline.

I'd expect rents to raise at least as much as mortgages, so until the next 2008-style house price crash nobody who bought a house during the pandemic is losing money.

> I'd expect rents to raise at least as much as mortgages, so until the next 2008-style house price crash nobody who bought a house during the pandemic is losing money.

This rise in rent stops as soon as unemployment starts increasing, which in the US it already has.

I kind of expect that, instead of the prices crashing in nominal terms, they will be inflated away by a few years of high inflation.

> Most people in the UK are on fixed rate mortgages, most of which are 2-3 year fixes.

You (UK) keeps using that word (fixed). I don't think it means what you think it means.

Also, I'm really sorry you're in this position. One of these days we'll figure out something better than Capitalism.

That is literally how they are marketed, and the rate is fixed for N years.

It's a seemingly rare case where the US terminology makes more sense than the rest of the world. In the US, a "fixed" mortgage is a fixed rate for the entire term of the loan (usually 30 years). Anything else is called an ARM (adjustable rate mortgage), even if it has a fixed component (e.g. a 5-year ARM has a fixed rate for 5 years and then becomes adjustable for the remainder of the term).

As I understand it, what the US considers a fixed rate mortgage simply doesn't exist in most countries, so it makes some amount of sense that the term "fixed" gets used for the next closest thing.

Here in Mexico we have the same: A fixed rate for a mortgage is the rate you will pay for the 20-30 years that your mortgage lasts. Of course over here, the cheapest rate you will historically find is around 7%.

Same in France. So if we agree with the US there's a chance we're right ...

"a changing fixed rate" sounds like an oxymoron to my ears.

Yes, this is why I've always been critical of fixes in the UK. They're not really fixes. You basically pay a significant premium and risk large early redemption charges for "long-term" fixes here in the UK (5-10 years), and even then they're not fixed for the lifetime of the mortgage so you still won't get the full protection from rate moves.

The best option you have in the UK is generally a 2 year fix because the fees and premiums are more reasonable. If I could take a US style mortgage I would have obviously. We just don't have that option here unfortunately.

It's hilarious though because you see so many articles written by "experts" here in the UK suggesting people take out fixes to protect themselves from rate moves, but a 2-5 year fix basically offers no meaningful protection. I'm not against people taking fixes, but I just wish they weren't sold in the way they are. They're barely safer than trackers and depending on your circumstances, you might actually be better with a tracker in many cases. As I said in another comment, people fixing for longer periods today may not realise they're locking themselves in to much higher rates for years and will be unable to switch to a better deal or sell their home without incurring large fees. The price you pay for that marginal safety really needs to be considered carefully.

Conversely, the US 30-year-fixed mortgages are fixed at a much higher spread vs the central bank rate. You pay a premium for the bank to insure you against higher rates. It's effectively option pricing, and neither side has a free lunch.

I was very happy to get a <2% fix for five years last year. I don't consider myself "locked into a high rate" because the rates are asymmetric: interest rates get weird towards zero and you're never going to see a negative nominal mortgage rate.

(as rates tend towards zero, house prices would tend towards infinity)

The UK has longer fixed rate mortgages right? Can you refinance now?

Quite hard to get one above 5 years, although HSBC are still offering <4% which implies they think this is temporary. https://www.hsbc.co.uk/mortgages/our-rates/

I'll speak with my lender this week. I don't think I can refinance for another few months without fees and at this point there's a significant risk in taking out a longer-term fix anyway because this move could be temporary and a fix would be locking in the higher rate.

There's really no good options. The right answer would have been to try to find a 10 year fix when I took out the mortgage but as I've explained in another comment they're very unfavourable for many reasons in the UK. You basically pay a premium on current market expectations for the fix and have early repayment fees were you to want to sell your home.

I took the risk last year of taking a 5 year mortgage at 1.7% because the upside of the rates going further down was nothing compared to the risk of going up and the premium compared to 2 years was very small. I strongly suspected that the end of the good times was near, but this surpassed by expectations. It is a significant mortgate and I'm currently not excluding that rates might be in the 10% in 4 years. It is not going to be fun.

If you lock in a high rate you can always refi down later

You must live in the US lol. No, you can't do this in the UK without incurring fees. Once you take out a fix you basically lock yourself in at that rate. You cannot sell or refi without fees, which are often in excess of 5%. If rates move down a lot perhaps that would make sense in some cases, but generally it doesn't.

The US has refi fees too. Whether it is worth it depends on how much longer you will stay in the house. It can be worth it if it it reduces your payment to something manageable with the option of only increasing the length of the mortgage by a little bit, i.e. borrowing the money for longer. You pay more in interest over the lifetime of the loan unless you can refi again at a lower rate.

I suspect if you calculate the expected average interest rate over the length of your ownership and the fixes (2-3, 5, 10) you'll get a similar number even with higher volatility in the specific rates. But you'd have to run the numbers/math.

This of course does nothing for the many 12-24 months of higher payments even if it evens out over time.

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