RSS FeedTracker Mortgage Conundrum
Posted by Senan
The ECB left its base rate at 1% today. The Bank of England did likewise in leaving their rate at 0.5%. The vagaries of the ECB certainly provides lots of column inches for financial media, and it has to be said, huge chunks of a previously non-financially savvy Irish population now hang on the words of Jean-Claude Trichet on a regular basis. But the result in a somewhat twisted psyche. Holders of these holy grails of mortgage contracts are relatively happy currently as payments have reduced significantly. However, the economies of Ireland, Europe and further afield are in the toilet, hence the low rates. So, what happens if and when the rebound happens? Rates predictably will head north again to tackle the inflationary consequences of the quantitive easing. Will this now growing economy please the trackies? I doubt it. Assuming they have held onto their jobs they will see overall static wages (taking into account possible previous pay cuts and even if inflation kicks in) for a while and will see their mortgage bill increase. This prospect also faces variable rate mortgage holders. The banks are sure to pass on increases even if they have not passed on all the preceding decreases. Think back to the '80s, an era of mid-teen rates. Grab your calculator and work out how much more you will pay on your 200,000 mortgage paying 16% instead of 3%. Not a pretty picture.
Positive job data from around the world today has sparked another surge in markets. It's extraordinary that these continual 'not good but not as bad as expected' reports have such an impact. The market makers are the big institutional traders, who generally have a short to medium term investment horizon. But it's a given that this will be a prolonged recession (even if there are turning point indicators), so I can't quite get my head around the reason of the exuberance. My own ignorance (and loss) maybe.
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