Right so the headline got you interested and you are probably expecting me tell you how and when interest rates are going to 17%. Well I am happy to say they won’t, in fact I would go so far as to say that they cannot.
Remember high interest rates in the 80s… they are long gone…
For the oldies amongst us that remember when rates did go to 17% you may remember that you didn’t have a personal loan, or a credit card or in fact any other real debt. Sure you had your home loan and maybe your car loan.
Banks back then didn’t have buy-to-let mortgages and very few people had scores of property in their investment property portfolio. It was a simple time when the governments around the world thought that raising home interest rates would mean that everyone stopped buying and therefore a recession could be avoided. You see back then by raising the rates on our biggest debt we had very few choices to fund our lifestyle.
We worked at one job (or a second if that didn’t pay well enough), you saved for things before you bought them and generally you lived off the money you had in your wallet (as many people didn’t even have bank accounts) and most people were paid in cash.
Fast forward to 2020 and you will find that many people work multiple jobs, they have alternative forms of income generation, small businesses, internet based businesses, investments and their income is from multiple sources. Sure, many people will have one job but they are unlikely to be at that job for their whole career that is now likely to be 60 years (not 40 like it used to be).
3% will be the new average base interest rate…
So my point is this, base rates currently stand at 0.5% (Nov 2014), it’s been that way through the entire downturn and I don’t think there is any hurry to raise it (until wages start to increase, which isn’t happening soon). In fact most economists cannot agree what to do, in one camp you have Japan who is a poor case of deflation, another you have the austerity crowd, who may claim to have won this round but we aren’t over it yet and finally the spend more/borrow more crew. Who’s right and who’s wrong I will leave that for the debating which has been burning for years and will continue to burn way past my passing.
So I cannot see how interest rates can go up to where they were!
As soon as rates start to rise people (who have less secure employment and more sources of debt (at higher rates in many cases) will stop spending a lot quicker. As they stop spending, the pressure will be off and rates rise. This is the basics why I believe they are likely to stay lower for longer and the average is to be lower than previous.
That and the fact that Japan makes a good case for what not to do (yet we have successfully told ourselves that it cannot happen to us.)
So enjoy these rates for a while longer, don’t jump into high interest rate fixed mortgages just yet but make sure you are prepared now for when they do rise.
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