The Bank of England governor Mark Carney has indicated recently that he expects interest rates to rise early in the New Year. He has also said that the expected rates to have risen by 2% in the next couple of years.
We have now had the Bank Base Rate held at 0.5% since March 2009 so any rise in interest rates at all could be a shock to the whole generation of borrowers who have now got used to rock bottom rates, with some younger borrowers having never had any increases at all in their mortgage life only decreases. So an increase could produce mortgage shock and this could impact adversely on the Housing Market. To add to this we only need to look back seven years when Bank Base Rate was 5.75%, and if the Governor is wrong with the new normal base rate being 2.5% into the medium term then it is entirely possible that rates could return to 2007 levels of 7.75% being charged. Although the last scenario could be seen as gloomy, it is by no means the worst case scenario with rates having been much higher than the 2007 levels in the past.
The good news is that for many there are some very good 5 year fixed rates with rates starting at 2.89% for borrowers who do not want to take risks into the medium term and perhaps would find it difficult to service the mortgage if the rates started to rise significantly. However, with 2 year tracker rates as low as 1.50% sometimes the decision can be very difficult, particularly if you think that rates will be little change in two years time. I think we all acknowledge that at some point rates will rise, but when is the unanswered question that gnaws away at many borrowers.
So if you are one of those borrowers who do not want to commit due to uncertainty with regard to rates what can you do to minimise the risk you are running. Suggestions are providing that your existing rate is not competitive you could hedge your bets and put half your mortgage on a fixed rate and half on a tracker rate. So if interest rates rise you only feel half the pain, but if they don’t you have had the benefit of low variable rates on half the mortgage.
Alternatively one lender allows you to take out a fixed rate mortgage for say two years but if due to market conditions or your personal circumstances changing, you would be happier with a longer term deal, you can escape your current deal and take out a new mortgage without paying penalties. Finally, you could just opt for a low variable rate deal with no penalties for opting out of it that would likely be less than 2% and then set yourself a target rate. For example; if the base rate rises 1.5% from that level and it getting nearer your mortgage comfort zone then you can opt out to perhaps a long term fixed rate that helps secure your long term future in the property market.
Getting the right deal for you is increasingly important as perhaps we are about to move away from the era of super low interest rates, so it is worth bearing in mind that a 2% increase that the chancellor is predicting, on a 30 year £100,000 mortgage would add £115 per month to your payments. It is crucial for borrowers to take independent mortgage advice to help them to make informed decisions about the best way to protect their future.
Kieron Bassett
13th October 2014
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