Mortgage Loan Rates over the Last Twenty Years
1991 was a year of financial catastrophe for many British homeowners. House prices were through the roof and many mortgage holders found themselves owing more on their mortgages than their homes were worth. The villain? Base interest rates which had peaked in late 1989 were still over 13 per cent at the beginning of the year. More than a hundred thousand homeowners lost their property that year.
Why were interest rates so high? Largely because the housing boom had run out of control, bringing back the high inflation which Margaret Thatcher had brought under control in the early years of her government. At that time the rate had hit 17 per cent, a figure unthinkable to anyone under 40 these days.
It was those high interest rates at the beginning of the 1990s which brought inflation back under control. Since then the rate has mostly continued to fall steadily. By the end of 1993, the base rate was down to 5.3 per cent. It hovered around that figure for the next few years, hitting a peak of 7.5 per cent in June, 1998, before beginning the more or less steady downward fall to its present historically low rate.
What do these wide swings in interest rates mean for the economy today? It’s difficult to imagine a return to double-digit interest rate figures but, with Britain in the grip of a recession and facing the burden of enormous debt, it is not inconceivable that the Conservatives would again look to high interest rates as a kind of economic shock therapy.
Can history repeat itself? Is it impossible to imagine the spectre of middle class families now paying £700 a month on their mortgages finding themselves with a monthly payment in excess of £2,000?
Levels of household debt are now much higher – an average of about £60,000 – than they were in the early 1990s. The effect of high income rates now would be catastrophic on British households. Even now there is a home repossessed every 13 minutes in Britain and a steep rise in interest rates would increase that a hundredfold. The Bank of England’s current economic policy is committed to keeping both inflation and interest rates down. However successive British governments have been suffering from a surfeit of optimistic thinking and budgeting since the beginning of the New Labour overhaul of Britain’s economy.
The country is now habituated to life at high debt levels and lulled by low interest rates. Could Britons survive a life without credit after the excesses of the past ten years or so?
It could be that they may have to, and a review of the historical interest rates only confirms that fact. The rapid fall in interest rates at the beginning of the 1990s lulled the country into a sense of eternal prosperity.
Given the history of the base interest rates, eternity could turn out to be a much shorter time than anyone expected.