As we have seen across the world interest rates are increasing – and quickly. Why is this happening and how high will interest rates go ?
For the last decade or so interest rates around the world have been at near zero. This was originally to help the recovery from the great financial crash in 2008 – but we have kept them there for over 10 years – this is unprecedented. Rates have never before been at zero or kept this low for this long. Keeping rates at zero creates imbalances and risks. Whilst the idea of “free money” might seem great, it has some very negative consequences. With money so cheap too much borrowing is done and too many bad investments are made. Huge amounts of money has gone into stocks, property and various other assets (bitcoin anyone ?). What we are seeing now in the stock markets and we are about to see in the property markets (globally) is the reversal of 10 years of too cheap money.
Central Banks and Governments want zero interest rates. It enables governments to say yes to all of the promises they have made – without having to ever pay for it or make difficult choices. The problem is that by doing too many things for “free” you actually end up pushing up the cost of everything. Inflation is too much money chasing too few goods and this is where we are today. There is too much money in the world. This excess money has caused the prices of all goods to increase dramatically.
With inflation running at 10% in Europe (Inflation) the only tool available to Central Banks is to increase interest rates. We have seen in the UK and the US that they are further ahead and have rates of 3%+. This has caused mortgage rates to go to 6% plus and thats coming in Europe soon. The ECB interest rate will rise from 1.25% to about 2.50% by the end of 2022 (rates) and will continue to increase in 2023 as inflation will not be brought back to 2%. Inflation will stay evevated throughout 2023. How can we forecast this? Well its just reviewing recent history – if there is any actual weakening in economic growth the European governments will simply drive more “free money” into their economies to solve this problem – think €200 energy vouchers. This will ensure we enter a period of Stagflation where growth is low yet inflation will stay high. Housing transaction may become even slower (www.transact.ie)
So what about my mortgage? Well our current base case is that rates will get to about 3.50% in 2023 so you will be looking at 6% plus mortgage rates. They will also be very slow to fall as inflation will remain elevated. People who are coming off fixed rates in 2023 will face some very difficult decisions and be in for some major monthly repayment increases. If you take someone who took a 3 year fix at 2% on a €350k mortgage – they are currently paying about €1,300 a month – the same mortgage at 6% will cost almost €2,100. That will not be sustainable for some households. Tough times are ahead !! Contact Pangea Mortgages to get the best solution for you and your family.
Information as of October 2022 – we expect rates will continue to change quickly in the coming months, not British Prime Minister fast (WTF) but still pretty fast none the less.Contact us to learn more about Interest rates meaning, interest rates ecb or mortgage interest rates (Interest rates fed)