Using interactive data tools to get a better understanding of how monetary policy may impact your mortgage payments
Table of Contents
1. Introduction
2. How did we get here?
3. Looking back to look ahead
4. Building a good scenario visualiser (the data interactive tools bit)
5. Understanding your options
It’s a tricky time to be a borrower, with many of us facing lots of uncertainty around current markets, making it difficult to know what the future holds for our mortgage payments. Interest rates are on the rise, and naturally so are the concerns of many homeowners.
Government policy can have a big impact on mortgage payments, both in the short and long term. It’s important to understand how these policies can affect you, so you can make the best decisions for your financial future.
In this article, we’ll explore the current landscape of mortgage rates, what’s driving the increases, and how to leverage a data analysis and visualisation tool like Streamlit to understand how to best navigate the tricky economic climate we’re currently in.
How did we get here?
The last few months mark a clear upward trend in mortgage rates. We’re now firmly exiting a sustained period of historically low interest rates set by governments and central banks, after an unprecedented amount of quantitative easing measures (policies designed to encourage growth) post the 2008 housing crisis, and most lately through the global pandemic.
The end of the sub 2% mortgage rate era
Higher base rates as set by the central bank leads to higher interest rates on mortgages and other lending products across the country. The recent hike in base rate was the Bank of England’s response to an increase in living costs, primarily driven by a surge in energy prices.
A quick recap on inflation
Inflation is the sustained increase in the general price level of goods and services in an economy. This means that the purchasing power of a unit of currency falls and, as a result, inflation essentially erodes the value of money. Rising inflation in the U.K. is a complex topic but can be partially attributed to a wide mixture of factors including rising import prices, an intense winter period placing pressure on our energy supply chains, and of course, socio economic uncertainty due to events such as Brexit, the ongoing war in Ukraine, and the global pandemic.
In an attempt to keep inflation in check, the Bank of England has raised rates seven times since December 2021, most recently in September to 2.25%, the highest level in 14 years.
The aim of these measures is to lower inflation to a Monetary Policy Committee recommended target of 2% (as opposed to the currently much higher value of around 9–10%), although the raise in the base rate also means that households are likely to see their real incomes squeezed in the short to medium term. Increasing the base rate and consequently borrowing costs incentivises consumers to save rather than spend, as incomes get squeezed and we become more mindful of future financial commitments.
The Bank of England’s decision to increase the base rate may help to curb inflation in the short-term by lowering demand for goods and services, therefore lowering prices. However, it remains to be seen how effective this will be in the long-term and what impact it will have on the economy overall.
Impact on mortgage lending
With concerns mounting around further interest rate rises and in the face of increasing market uncertainty, most consumer lenders will take measures to adjust their pricing to account for increased costs of borrowing, adjust their affordability assessments to account for inflation (and also potentially reduced house prices), and revise their risk assessments in accordance with heightened market volatility. Some major mortgage lenders have even gone to the length of temporarily halting their mortgage products altogether in an attempt to maintain a strong position on risk aversion.
This means that, for many people looking to buy a home or remortgage, the process has become more expensive and more difficult. It’s not all bad, though. If you’re currently on a fixed rate mortgage, your repayments are unlikely to change until this rate expires. And if you’re looking to remortgage, there are still plenty of deals out there to be had — you just might have to shop around a bit more to find one that suits your needs and to set your expectations that the you’re now more likely to start paying a higher price.
Looking back to look ahead
The base rate may not mean much to most people, but it’s a big deal for those with mortgages. And right now, the markets are predicting that the base rate could rise to nearly 6% by next spring.
In order to know what to expect if you’re due to remortgage in the next few years or to purchase your first home in a similar time span, it’s useful to look at the wider historical context of the base rate and the various factors that impact it.
Historically speaking, base rate increases and decreases tend to closely follow inflation as the base rate is the main instrument of monetary policy. So when inflation rises sharply, the base rate is likely to rise also.
Given what we know about the current levels of inflation, energy prices as an underlying contributing factor, and how current levelling compares to historic levels — it’s reasonable to assume that we’ll continue to see levels of inflation above the 2% target well into next year and we should probably expect to see further base rate hikes until inflation levels eventually start to decrease and normalise.
So, what does this mean for those that locked in fixed rate mortgages during the period of historically low base rates? How much can you expect to pay when the initial rate on your mortgage expires and it’s time to remortgage? Trying to do a good job of answering these questions can get pretty difficult, and it’d be great to get some help to allow us to easily understand and visualise the potential scenarios ahead.
Building a good scenario visualiser
Before we build our tool, let’s get a clear idea of what insight we’re trying to gain and what assumptions we’re willing to make.
Key insights we’re looking to get
- Assuming, I’ve currently got a mortgage and I’m on a fixed rate for a set term. What will my monthly debt repayment schedule look like? How about annually or over the lifespan of my mortgage?
- What am I paying now and what am I likely to pay when I remortgage? and how will that change depending on what’s happening with the economy?
- How do some of these different options compare?
Carefully thinking about how we visualise our data
There’s something special about a hand-drawn diagram or graph. It’s a reflection of the thinker’s mind, a trace of their thought process as they worked through a problem. It’s a snapshot of a moment in time, of a particular way of seeing the world.
Most modern visualisations are generated by computers, using a single description to create a static picture for any dataset. This has its advantages — it’s efficient, and can be tailored to the specific needs of the viewer.
The power of interactive data visualisation lies in its ability to give us flexibility in how we capture the essence of a problem, and the way we think about it.
A key difference in creating interactive data visualisations as opposed to static ones (for a static example, think of a graph you produce in excel, which you then display as an image in a presentation), is that it enables for rapid feedback in the data exploration process. This dexterity is what makes it such a powerful tool for understanding complex problems as it allows us to quickly see the data in different ways, and to find patterns in information that might otherwise be hidden.
Putting things in practice: Building an interactive data visualisation interface with Streamlit
To build a simple dynamic visualiser we’ll start by thinking of our inputs (control variables) and the outputs (charts, graphs, tables etc)
What are the scenario control parameters?
- Properties of your current mortgage
- Properties of your mortgage deal when you’re next due to remortgage
What are the calculated outcomes?
- Amortisation (mortgage repayment) schedule
- Monthly and lifetime costs
- Comparative cost analysis
Streamlit is a really powerful Python utility that makes it easy to create dynamic, custom data apps in just a few minutes. Using this library we can construct our control panel in just a few lines of code!
Next, we’ll use this package, in a combination with a few others to calculate and visualise our key insights. There are a few more pieces needed to complete our interactive data puzzle and properly connect our control panel to the visualised outputs.
A few of the Python packages leveraged to help us make the right calculations:
- We use the NumPy financial python library in order to calculate interest payments and monthly payments in a few lines of code.
- We use the Pandas python library in order to allow us to manipulate and represent tabular data such as the repayment schedule (Think excel but in code).
Putting it all together
The finished product allows us to leverage an interactive way to analyse and compare how your mortgage future might pan out depending on a few key assumptions.
You can use a demo version of this app here, to try and see how different scenarios may impact your individual circumstances.
Money Saving Expert states that, for each 1 percentage point your mortgage rate increases, you should expect to pay roughly £50 more a month (£600/year) per £100,000 of mortgage debt. We can use our app to validate this case using some friendly numbers for illustration.
Assuming,
- Your current mortgage loan value is £100,000
- You’re currently paying 1% in interest rate charges
- You remortgage at the end of your initial term with a rate of 2%
- With a new loan term of 24 years
Our tools tells us that we can expect our monthly payments to increase by around £42 per month, and around £89 per month when we increase the rate again to 3%.
We can also use our tool to see how the cumulative repayments look over the course of the loan’s full term (using a few assumptions around rate consistency and the type of mortgage you’re on). You can see the impact on how much interest you’re paying by the jump in the light blue line below around the end of the initial term, when the rate increases.
Understanding your options
The current situation is unprecedented, and it is impossible to know for certain what the future holds. However, there are some things that we can do to protect ourselves from the worst of the inflationary pressure. For example, switching to a cheaper mortgage deal at the right time and overpaying when we can are two options that can potentially help to ease the financial burden.
All in all, one of the things that has become clear is that our ability to make quick and smart data driven decisions will become even more key to modern economies as we face periods of high uncertainty and growing rates of inflation. To that end, understanding our data and how it can help us make informed decisions about our financial future is more important than ever.
