Base rates have not moved from their historically low levels of 0.5% since March 2009. But it is looking increasingly likely that rates are going to change with the Governor of the Bank of England dropping heavy hints that rates could rise next year. He has indicated that the rate increases will be slow and gradual with its first increase being 0.25% and some commentators are pencilling in base rates to have risen to 2% by 2017. In addition to the Governors recent comments Janet Yellen, his opposite number in the US, has also recently commentated on interest rate rises and has said it is possible that their rates could rise this year.
We have had plenty of speculation about interest rate rises in the past, but then something would happen to delay the rate rise. The same thing could apply this time, but both the UK and US have gathered strength in the recent past and there are signs that most peoples standard of living is increasing. This has happened due to wage rises that for the first time in many years have increased faster than admittedly very low rates of inflation. So I believe that the Bank of England are thinking that the consumer is now strong enough to be able to stomach a rate rise. Also swap rates on the money market that are a measure of how rates are seen to move in the future with five year rates having edged up from 1.532% two months ago to 1.785% now.
So I do think that the signs are that we are near a rate rise, but I think the big question is how people respond to the rate challenge. Many homeowners have never experienced a rate rise as the last time interest rates actually went up was 11th July 2007, so any rise for them could be a shock. I believe that the best way to deal with the predicted rate rises is to consider remortgaging to long term fixed rates, with many five year rates around 2.5% and 10 year rates although having just risen still good value at just over 3%. Many borrowers have had very good base rate trackers over the last few years averaging out at around 2.5% that turn out to be very similar to the fixed rates.
Therefore for many there could be little or no shock if they hop off the variable rate train and hitch a lift on a fixed rate one. But one thing to consider is that once you have left your base rate tracker you will not be able to return to it after your fixed finishes. For example Nationwide Building Society, in keeping with lots of lenders, have a base rate plus 2% for long standing borrowers making a pay rate of 2.5%, but new borrowers have to pay 3.99% pay rate. So perhaps to overcome this all things being equal it may be worth giving consideration to a 10 year fixed if you don’t want to run the risk of exposing yourselves to a 3.99% rate in five years time even if rates haven’t risen.
Even though I believe that long term rates offer excellent value for remortgages they are not right for everyone as it does depend on your circumstances. However I do think that over the next few months it is crucial for borrowers to have a mortgage check up to ensure they have the right deal when rates do rise.
Kieron Bassett Dip PFS, Cert SMP
3rd August 2015
“