We’re living in a world of debt these days…literally. There is 97% more debt on the planet than actual money and with debt, there’s always Interest. So hopefully you can see why interest rates are one of the most important things to know about. Typically, interest rates are controlled by a country’s Central Bank, so in our case the Bank of England. High rates mean that it is more expensive to borrow money for a country and low rates mean that getting money/credit is really cheap…and so too are the monthly/quarterly/yearly interest repayments. So the best way of looking at this is like the accelerator pedal in your car. You (the driver) are the Central Bank and if you want the economy to grow faster, you push the accelerator down which lowers rates which makes it cheaper for the public to get credit to spend in shops etc. And if the economy or inflation starts getting out of control, you just raise the accelerator which raises rates so borrowing currency is more expensive and your repayments are dearer.
One of the reasons for this financial mess we’re in is due to falling rates over the last 30 years and now they’re effectively 0%. So it’s really cheap for our government to borrow and spend spend spend. But the reason every homeowner needs to know about rates is because of your mortgage. Your mortgage is based on the country’s base rates. So if you’re on a Standard Variable Rate/Tracker mortgage then your monthly mortgage repayments go up, when interest rates go up. So on a £200k house/mortgage, for every 1% rates go up, your monthly repayments go up about £120 per month. And guess what…the UK’s 300 year average is 7%. So WHEN rates rise by another 7% at least (I’m expecting double digit rates within 7 years) your mortgage repayments will increase by another £840 per month. The average family on a tracker mortgage simply won’t be able to find an extra £500-£1000 to keep up with their mortgage, so they’ll default or forsake their homes. This will put more properties up for sale and eventually the UK will turn into a repossession nation. As an investor, you should only buy assets when there is blood in the streets and so that is the time to jump in with both feet into the property market…not now when there’s a party in the streets…Don’t forget that we’ve seen double digit rates 3 times in the last 30 years so don’t think it can’t happen! Rates reached around 15% in the 1990s and increased 5% in 1 day in 1992 when we dropped out of the ERM!
However, the real problem is the nation’s debt. It currently stands at £1.28 TRILLION. And right now our government is struggling to pay the interest on that with the low rates we currently have. So rising rates will likely default the nation and so the Bank of England and the government will do everything possible to stop rates from rising, however you need to remember that no man or government can hold against the markets indefinitely….the markets always win…
What do you do then?
This is by no means advice, but simply what I’m suggesting my close friends and family to do. 1.) FIX YOUR MORTGAGE. This is the best insurance policy you can get right now. There are some fantastic 5 year fixed rate deals. I know a fantastic mortgage guy if you need one. 2.) Buy Silver (Silver rises dramatically in price when rates go up, typically). 3.) Learn to trade the currency markets. The Pound Sterling is set to fall off a cliff, if you know how to trade currencies you’ll be nicely positioned to profit from this in a big way. The last time the Pound was in this position, George Soros ‘shorted’ (sold) the Pound and made £1 Billion profit. What we’re seeing right now is a near identical situation to his trade set up…exciting times hey?
I can’t emphasise enough, how important a life skill it is to know how to trade the currency markets…and it only takes less than 5 minutes per day!