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UK Interest Rates - do they need to be tweaked up a little?

Discussion in 'Serious' started by Zak33, 14 Jul 2017.

  1. Guest-23315

    Guest-23315 Guest

    Nooo but I want to buy more corporate debt!
     
  2. Guest-23315

    Guest-23315 Guest

  3. RedFlames

    RedFlames ...is not a Belgian football team

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    The BoE have been 'There'll be a rate rise shortly' for years though...
     
  4. Guest-23315

    Guest-23315 Guest

    Midday today should be the day kiddos.

    Probable quater percent increase, but half a percent would be lovely.
     
  5. Corky42

    Corky42 What did walle eat for breakfast?

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    Not so lovely for the average person, half a percent would leave most people needing to find an extra £280.
     
    Last edited: 2 Nov 2017
  6. sandys

    sandys Well-Known Member

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    I would like it to shoot up massively, it's been too low for too long.
     
  7. Nexxo

    Nexxo Bargaining chip

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    Yup, but the average person appears to have voted for this...
     
  8. Guest-23315

    Guest-23315 Guest

    .25% rise should be £11-12 a month extra for the average mortgage owner.

    That is literally the price of a 20 pack of ciggies, or 2.5 pints.

    [​IMG]
     
  9. RedFlames

    RedFlames ...is not a Belgian football team

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    It'd also be the level it was pre-brexit referendum, so hardly a colossal shock...
     
  10. Corky42

    Corky42 What did walle eat for breakfast?

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    Isn't it more like £35 per month, I'm useless at maths but if the average mortgage is £175,000 then a quarter percent rise means and extra £440 odd per year, divide that by 12 and it's around £35, no?
     
  11. RedFlames

    RedFlames ...is not a Belgian football team

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    [​IMG]
     
  12. Corky42

    Corky42 What did walle eat for breakfast?

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    I've obviously got my maths wrong then, although not knowing how probably goes to show how pathetic i am when it comes to numbers. :D
     
  13. bawjaws

    bawjaws Well-Known Member

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    You can't just take the capital multiplied by one year's interest to get the difference, because the repayments are determined by annuities that take into account the term of the mortgage. Your calculation only works if you are making a single repayment.

    The reason for this is because the repayments are calculated as the capital divided by an annuity (which is dependent on the term and the interest rate). The formula to calculate an annuity in arrears is

    a = [ 1 - (1+i) ^-n ] / i

    Where i is the interest rate and n is the term. Oh, and this is a simplification because it assumes a single annual payment in arrears, rather than 12 monthly payments in arrears, but it starts getting messy when you have to introduce i(p) rather than i :D

    So the annual repayments are C / a = C / [ 1 - (1+1)^-n ] / i = Ci / [1 - (1+i)^-n]

    So we can see that the repayments don't vary in direct proportion to changes in the interest rate.

    If you imagine that we have a hypothetical mortgage that is repaid annually in arrears, then we can put some numbers together. For the sake of the example, the capital is £100 and the interest rate is 4% p.a. So our repayment is £104. But if the term is 2 years, our repayments are £53.02 p.a.

    So let's vary the interest rate by 0.25%, to 4.25% p.a. Our repayments over a one-year term are now £104.25, but over a 2-year term they are £53.21 p.a. So we can see that the repayments don't vary in direct proportion to the change in the interest rate when the term exceeds one repayment.
     
  14. Nexxo

    Nexxo Bargaining chip

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    OK, hang on...

    [​IMG]

    [​IMG]
    Nope.
     
    sandys likes this.
  15. bawjaws

    bawjaws Well-Known Member

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  16. Guest-23315

    Guest-23315 Guest

    Or you just buy a TI BA II+ and use their Quants functions...

    But yes, all of the above is the (basic) correct maths behind it.
     
  17. Guest-23315

    Guest-23315 Guest

    I've also talked about it previously, but if you have any interest in learning about how all these formulae work and how a small rise here affects this over there - I cannot reccomend getting and learning this book enough:

    [​IMG]

    Its what I've used since 2010, and it taught me the vast majority of the maths behind IMC & CFA I/II - I even have a 2nd copy on my desk at work.
     
  18. bawjaws

    bawjaws Well-Known Member

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    Or just do it all in Excel, using the PMT function :D And yeah, that post is a simplified model because no-one wants to be calculating i(12) or any of that **** :D
     
  19. Guest-23315

    Guest-23315 Guest

    Make continulously compounding interest great again.
     
  20. Nexxo

    Nexxo Bargaining chip

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    Could be a good catchphrase for Trump --if it didn't have so many long words in it.
     

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