The think tank, Policy Exchange, this week grabbed the headlines by bucking the trend and issuing a distinctly alternative view of what could happen with interest rates.
Whilst many have suggested that Base rate has some time to go at the current low levels (see our recent blog), Dr Andrew Lilico, Chief Economist at Policy Exchange has painted quite a different picture. He suggests that following another period of contraction the economy could begin to grow rapidly leading to high inflation. In order to try and control this he says that Base rate would need to rise rapidly, to the region of 8%.
Of course that would lead to significantly higher mortgage costs than the predictions of other forecasters. It would therefore lead to a very different choice of mortgage product, with a fixed rate to protect against rising rates being the prime candidate rather than a variable tracking deal.
So who is right? Ultimately no-one really knows! Whilst the consensus is that rates do not look likely to rocket it is still not certain. What these contrarian forecasts do help to do is focus borrowers’ minds on how they would be able to cope with different situations.
The important thing is to pick the right deal for your own situation. Looking at the monthly budget and seeing how it would alter with different moves in Base rate will help the borrower focus on how much tolerance they have for rising rates. This is the practical way to help decide whether to fix or track.
Try our rate change calculator – it is a useful tool to see how monthly payments would fluctuate with the ups and downs of Base rate.