News & Views Mortgages Interest Rates and Your Mortgage
The Crystal Ball of Interest RatesInterest rates and your mortgageWill they or won't they rise? Historically, interest rates have been notoriously difficult to predict yet their implications for mortgage holders are enormous. For most people, a mortgage is the biggest debt taken on during their lifetime. How much you pay each month towards your mortgage will undoubtedly affect your lifestyle and perhaps you and your family’s future plans. It’s therefore imperative that you make the right decision, making the most of market conditions during the lifetime of your mortgage where possible.
In other words should you fix your mortgage rate or not and for how long? A valid question, yet the holy grail of answers sought in recent times for anybody needing a mortgage, remortgaging or coming to the end of a deal. The long term outlook for interest ratesNobody can really predict what interest rates will be in the long term. It would, however, be a reasonable assumption that they will go up in the future, even if the exact timescale is unknown. We have certainly had unprecedented low interest rates for 2 years or more now with many, including some members of the Bank of England Committee, arguing for an increase in rates to combat inflation concerns. Yet these calls for an increase have now stopped. Why is that? What has changed?Possibly the two biggest reasons for interest rates remaining generally low (they’re currently at 0.5%) stem from the US and the state of our own fragile economy. Within the last month, the US Federal Reserve (the UK’s equivalent of the Bank of England) has dramatically announced its decision to commit to low interest rates and no increase before 2013. A serious state of intent indeed and, it could be said, a commitment unheard of before. Such a decision could be due to information on the state of the US economy that we’re not party to or an acceptance that growth will be anaemic and painfully slow. Whatever the reason, it’s extremely unusual. Particularly for the US who often like to speak in open ended terms to give themselves the ability to manoeuvre and not commit to big promises. On this side of the Atlantic, the UK and European economies are barely growing and may slip back into recession along with the USA.
Calming inflation it seems is well down on the list of priorities. Survival of world economies would appear to be the main target. How does this affect UK mortgages?Bearing in mind the USA represents 28%* of the world’s consumer spending, the close trade links between the UK and USA and the massive impact the US economy has on the UK economy, the answer is greatly! The UK cannot totally control its own destiny. What happens in the USA and Europe significantly affects our interest rates and thereby mortgage rates. It’s both historical and more than probable that we will follow our friends across the waters and synchronise our interest rates to a lesser or greater extent in line with them. If they stay low in the US and Europe over the next couple of years, it’s likely they’ll stay low in the UK. Whilst this doesn’t mean interest rates in the UK won’t rise, it is an indication that if they do rise, they may do so at a much slower rate than previously thought and not for some time. But what does this mean for you?The decision to fix or not to fix a mortgage is often governed by the individual’s financial fears or simple wish to know the exact amount they’ll be paying each month for peace of mind. It may also be based on the way they feel interest rates are likely to go. Let's say, for example, a mortgage of £250,000 over 25 years had a fixed rate of 5%:
If you consider the fact that rates are likely to stay low for longer than previously thought, the extra savings gained from a lower rate may diminish the importance of having the security offered by a fixed rate, particularly for those doctors and dentists with a large mortgage. Opting for a variable or discounted trackerBy opting to go on a variable or tracker rate for a period of time means you can take advantage of the current low interest rates. Indeed, some will make a calculation that they can afford for interest rates to rise substantially before they are financially disadvantaged, as long as they get the benefit of low interest rates for say a couple of years. However, inherent in this strategy is uncertainty in the medium to long term. Opting for a fixed rateFor those that want ultimate security, opting for longer fixed rate deals of 5 years or more might be the answer. When interest rates do increase, they’ll have peace of mind knowing that they’ll be paying the same amount each month. The downside here is that if interest rates do not rise for several more years, you won’t benefit from the savings of a lower variable or tracker rate. In summaryAs always, which route you opt for comes down to how much risk you are willing to take, your objectives in relation to your mortgage and your disposable income. There are, of course, other strategies you can take other than those provided above. We strongly recommend you speak to your financial adviser so that you choose a strategy that’s right for you and your individual circumstances.
Article by Mike Rawson
* Source: Daily Finance Consumer Power's Big Shift From the US to China and India by Pallavi Gogoi 26th March 2010  |
With the cost of living on the rise and NHS budget cuts being made everywhere you look, wouldn't it be great to pay less each month or have an upper limit on your possible outgoings.
Whilst one of the main benefits of increasing interest rates is to calm inflation, many commentators and economists are pointing out that the various economies are not strong enough to cope with higher interest rates for some time and raising rates would make economic conditions worse than they already are.
The latter gives a saving of £348 per month which in anybody's eyes is substantial. But, it doesn’t give peace of mind knowing how much is going out of your account each month.