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Having personally just purchased a home in the US I can say that a 400 bps increase in a variable interest rate would effectively double my housing cost, and pl
by lumost 7y ago
Having personally just purchased a home in the US I can say that a 400 bps increase in a variable interest rate would effectively double my housing cost, and place my home underwater as the Total Cost of Ownership would more than double over 30 years. If the interest rates increased by 600 bps to the maximum of the last 30 years I'd unavoidably default and declare bankruptcy.
On a per consumer level a variable rate is much higher risk, even in countries with highly variable inflation rates some fixed form of incomes will not inflate uniformly with the economy and a variable rate would increase the rate of defaults. On the other hand the loan terms and risks are determined once at loan origination where it's quite feasible for a financial institution to hedge out any long term inflationary risk.
- xfitm3 7y agoWhat is bps in this context?
- SilasX 7y agoBasis points, which are a hundredth of a percent on an interest rate, eg “6% is 200 bps more than 4%.”
- nvarsj 7y agoOh yes, it's a big risk. I think this is at least one reason why policy makers are so hesitant to raise rates. Especially in places like the UK, where many home owners are highly leveraged assuming a low interest rate, yet only have 3-5 year fixed rates. I wouldn't be surprised if there were a large increase in defaults if the interest rates went up here. It would probably bring home prices down to more reasonable levels as well.