Interest rates in the UK have now been at 0.5% since the 5th March 2009, that’s nearly six years. Good news for those who had tracker mortgages, not so good news for those reliant on savings.
But we now have a problem. It’s really time to decide and let everyone know a fixed date for increasing interest rates. If we don’t, there is a real danger that people will assume it will never happen. For anyone in debt, such as those owning their home with a mortgage, low rates are good news as it means access to cracking rates, especially with deposits of 40% or more. News last week showed Natwest launching a 2.99% five year fixed rate with a 40% deposit and a £995 fee while Nationwide offered a two-year fixed rate mortgages at 1.84% for new mortgagees and 1.74 percent for existing customers, charging a £999 fee.
Raising rates is essential because for those that have cash savings, it’s a disaster. Many older people relying on their savings to top up their pension, find instead, their cash is now worth less each year. Which? points out that “In January 2008, the average instant access cash ISA rate was 5.39%. This had fallen to just 1.28% by March 2014.” And with inflation (the cost of living) running at 1.2% this year, this means the money in the bank isn’t really earning anything at all.
Why do we need to know when interest rates will rise? Because we need to plan our finances. A 0.25% rise in interest rates will have an effect on everyone who has a variable mortgage. If you own a property bought for £100,000 and your mortgage is £95,000, a 5% repayment mortgage rate, over a 25 year period, means a 0.25% increase will cost you an extra £14 per month. If mortgage rates rise to 7%, you could be paying an extra £117 per month.
If you own a property worth £150,000 and your mortgage is £130,000 with a 3% repayment mortgage rate and the same assumptions as above, a 0.25% increase will cost you an additional £18 per month. If mortgage rates go to 5%, you could pay around £147 extra per month.
Although these are examples above, it’s essential to know these numbers for your own circumstances so you can plan ahead. What is incredibly important at the moment is to seek specialist advice from a good mortgage broker or independent financial advisor. Whatever anyone else you know is doing – fixing or staying variable – you need to do what’s right for your personal circumstances and with mortgage rates being so low just now, it’s worth checking out if you can get a better deal not just now, but for the long term.
Latest suggestions are that interest rate rises may well be put off until Autumn 2015 – after the election next year. But, its also being suggested that mortgage rates are forecast to rise after Christmas, irrespective of what happens to interest rates. The main good news for the future is when rates do rise and however quickly they go up, they aren’t expected to go back to pre-credit crunch rates of 5-6%, but to settle at 3-4%. This means, providing we don’t get another economic shock that drives rates upwards quickly, low borrowing rates could be here to stay for some time.
Kate Faulkner is Managing Director of propertychecklists.co.uk. The site gives free advice to consumers on how to measure their local market and an understanding of how to buy their first home or trade up. Kate’s background stretches from self-build to part exchange to buy to let and renovation. She is the author of the Which? property books and regularly appears on local and national media.