Date:10 February 2011 I Comments: 5 I Views:14,867

My mortgage has been on my lender’s Standard Variable Rate (SVR) for over a year now and once again the Bank of England has announced that the Base Rate is to remain at 0.5% for the 23rd month running.

So here I sit, safe in the knowledge that for another month my mortgage repayment will stay the same. The big question is, how much longer will it stay this way?

The talk of rate rises has been a buzz for sometime and as more time passes the louder the buzzing seems to be getting.

Markets were suggesting a 25% chance of rates rising today but a 25% chance isn’t that high.

If someone told me there was a 25% chance of winning the lottery I’d get my money out but it’s no comparison when it comes to trying to predict rate changes in this tumultuous economic climate.

When markets suggest there is a 75% chance or more that rates will rise, then the likelihood of an increase will be much more profound.

And the markets are suggesting a 75% chance of a raise in rates by May.

Here’s a good analysis of feelings and predictions: http://www.thisismoney.co.uk/interest-rates

But what of my mortgage?

Should I be thinking about a fixed rate for safety? I don’t think there’s much point considering a tracker at this stage because rates can’t get any lower. Even though trackers are still cheaper than fixed rates it wont take much of a rate rise to make them less competitive.

So I’m leaning towards a fixed rate but my worry there is what will rates be like in a few years time? If I fix my mortgage now for 2 or 3 years will it be a massive ‘rate-shock’ when I come to remortgage then?

I’m partially inclined to think not… Not because I don’t think rates will have risen by then but because rates have been exceptionally low for quite some time now and even if the base rate rises by 2% in 2 years time mortgage rates are not likely to sky rocket above and beyond the heights of late 2007 – 2008.

In early 2008 mortgage rates were about 5.6% for a 2 year fixed deal.

At the moment the average  is around 3% (if you want to pay a very high arrangement fee for a 1 year fixed deal the lowest is actually 2.14% – amazingly low but totally unrealistic as a product & Santander have a 2.65% offer but you have to go direct and they have on occasion been known to ‘cherry pick’ the best customers).

So if the base rate rises by 2% and Swap Rates do the same (currently about 2% for 2 year money) then mortgage rates might climb back up to around 5 – 5.5% ish.

Compared to a 3% product it would be a jump but compared to historical mortgage rates it’s actually not that bad!

Unless of course the cost of living goes up and income doesn’t, then it could be a squeeze….

Ah, the prevailing winds….

Category: Mortgages

Comments

  1. If you’d be selling the house in less than 5 years or you know your income is rising, then stick with the variable-rate mortgage. But with rates currently rising and dropping every time, opting for a fixed-rate plan is a better option, even if you only plan to stay in the house for a few years. If rates go up sharply, a 6% variable-rate mortgage can nearly double in just three years.

  2. Thanks David but with no knowledge of the current interest rate it’s impossible to advise doing nothing for 5 years.

    & Nobody in their right mind would stick with a rising interest rate just because they start earning more and can afford it. Nobody should ever pay more than the best rate they can obtain (without incurring unreasonable costs in the process).

    & It’s a total contradiction to say ‘stick with the variable’ and then later, ‘a fixed plan is a better option’… (you need to get to ‘know your customer’ a little better)

    In addition, the scenario described in your last sentance would clearly require rates to increase by nearly 6% in three years in order to nearly double a 6% variable mortgage.

    I don’t see that happening…

  3. We are starting to see fixed rate mortgage rates increase already with 2 year fixed increasing by 0.25% in the last month, if you are on a low low SVR it is prob still worth waiting but if your are on a medium to high SVR maybe you should start looking at your options.

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