Eight years of low rates

Eight years of low rates
The Bank of England chose to keep interest rates on hold again in March, marking eight years of rock-bottom mortgage rates for homeowners.

The Bank’s Monetary Policy Committee (MPC) first cut the Base Rate to just 0.5% in March 2009. Few could have predicted at that point that rates would fall further still, but in August last year, the base rate was cut to a new record low of just 0.25%, following Britain’s vote to leave the European Union.

While savers have really suffered from plummeting returns over the past eight years, ultra-low mortgage rates have been great news for borrowers, making owning a property more affordable than ever before. Following the August cut, some of the lowest ever fixed rate mortgages were introduced, enabling homebuyers to keep monthly mortgage costs to a minimum, and existing homeowners to reduce their monthly payments by remortgaging.

No-one knows when the Bank of England will decide to raise rates, and it currently remains firmly on the fence given the uncertainty that Brexit represents. In contrast, the US has just raised interest rates by a quarter of a percentage point to 1% in a bid to stave off inflation. US interest rates are now at their highest level since November 2008.

While inflation is also a concern in the UK – it reached its highest level for more than two years in January at 1.8% - the Bank of England has stated that the current 0.25% base rate is “appropriate” to support the post-referendum economy as we negotiate our way out of the EU.

The Bank’s latest forecasts show that inflation is expected to remain above the 2% government target for the next three years, reaching a high of 2.8% in the first half of next year.

Even though interest rates remain unchanged at the moment, homebuyers and owners must remember that there is always the potential for mortgage rates to rise. That is particularly true as earlier this year, swap rates, which are the rates banks pay to borrow from each other, showed signs of increasing. Swap rates are among the factors which determine the level at which fixed rates are set.

If you are considering buying or remortgaging, it may therefore make sense to take advantage of current competitive deals while they are still available. Never choose a mortgage on the basis of a low headline rate alone though, as you should always look at the overall cost of any deal, including any arrangement fees.

Remember too, that if you are considering locking into a longer term fixed rate mortgage to protect yourself against potential future interest rate rises, you need to consider how much flexibility you are likely to need. If you want to move in future, you’ll need to check any deal you sign up to is portable.

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