The last month has seen some interesting news and views on the subject of interest rates and when we may see them on the up again.
At the Monetary Policy Committee’s July meeting, the Bank Rate was left yet again unchanged at 0.50% - the 16th month in a row. However, MPC member Andrew Sentence maintained his contrary position from the previous month and was the only member calling for an immediate increase of 0.25%.
His call to start raising rates was backed up last week when the Office of National Statistics released preliminary estimates showing that the UK economy grew by 1.1% in the second quarter of 2010 – a huge leap in GDP terms.
However, the National Institute of Economic and Social Research (NIESR) claimed this week that the pace of growth in the second quarter was a blip and forecasts much more subdued growth for the rest of the year. It also predicts below target growth for 2011 and 2012.
Another forecast out this week was that of Ernst & Young’s ITEM Club – it said that interest rates will need to stay at their current all-time low of 0.5% until 2014 as last month’s tough budget measures are predicted to slow the country’s recovery for the next two years.
The latest view this month has come from the Governor of the Bank of England. Appearing before the Treasury Select Committee on Wednesday, he said whilst there will come a point when interest rates should return to normal levels, “there is some considerable distance to travel before we can begin to use the word “normal””.
So the views from the experts range from an immediate need to increase rates to no change at all for at least 3 years. Uncertainty seems to be the one thing we can be certain of at the moment.
What are homeowners to make of that and what does it mean for mortgages? As it’s far from clear when rates will rise again and by how much, borrowers should be looking for a mortgage deal that they feel comfortable with during this period of uncertainty.
If your budget is tight and the thought of rising monthly mortgage payments gives you sleepless nights, then a fixed rate is a good option. We’ve seen some lenders cutting fixed rates in the last couple of weeks which is good news – Northern Rock recently cut some 5-year fixes by 0.60%.
If your mortgage is easily affordable and you could handle rising payments, then a tracker rate would be a good bet and would give you access to some of the cheapest rates currently available. Our rate change calculator can tell you how much your monthly repayments would be affected by different rate rises.
For the undecided, some lenders have responded with new products recently. Coventry Building Society recently launched two new capped rates – both offering decent variable rates, capped at 1% above the initial payable rate for two years.
Woolwich has also just reintroduced its ‘drop lock’ option. Available on all new tracker and offset deals, this feature allows borrowers to switch to any new fixed or capped rate at any time, with no Early Repayment Charges to pay.
This is a handy feature, although borrowers must be aware that if they wait until interest rates have already gone up before switching, the cost of fixed rates will have undoubtedly already risen.
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