Get ready for Base Rate rises

Rising inflation has led to speculation that Base Rate could rise sooner than was previously thought

It’s one of the most commonly asked questions of financial experts and economists and yet a convincing consensus still eludes them. When will interest rates rise?

With the Bank of England Base Rate having now been at its record low of 0.5% for 14 months, both borrowers and savers are keen to know when it will go up. Because go up it will, that’s about the only thing the markets are agreed on. When it will rise and how quickly is the subject of much debate.

Those expectations have been changed again thanks to the monthly inflation figures from the Office of National Statistics.

Back in March the Consumer Prices Index (CPI) -- the Government’s official measure of inflation -- rose to 3.4% from 3% in February, a pretty sharp increase. However, in April it rose even further, to 3.7%. (These are the latest figures available, with May's data set to be released on 15th June).

The Retail Prices Index, which leapt by 0.7% to 4.4% in March, jumped even further, up to 5.3% - it's highest level since July 1991.

Inflation is on the up, and that has given many experts the jitters that a rate rise is on the cards. But why?

Off target

The Bank of England controls interest rates to help it fulfill its brief from the Government to keep inflation as close to 2% as possible, and between 1% and 3%.

John Fitzsimons looks at three easy ways to reduce how much you are forking out on your mortgage each month

Clearly, we are out of the bounds of this target and the Bank’s mechanism to bring inflation under control is to increase the Base Rate.

That doesn’t mean it’s a given that rates will go up. Indeed, as the Bank of England pointed out in its last Inflation Forecast it expected inflation to rise before dropping back down, possibly even below target, later in the year. It does have a bit of leeway to let inflation increase slightly before pulling it back down with Monetary Policy – as, it does also need to avoid provoking deflation.

But the fact inflation is rising does make it more likely we will see rate rises sooner rather than later. Other indicators point to this too. Producer output prices -- which represent the price of goods made in the UK and exported -- rose 5% last month, the highest rate of increase for 16 months, and soaring oil prices are increasing inflationary pressure.

Some members of the Monetary Policy Committee have already mooted concerns about rising inflation, leading money markets to price in rate rises. Indeed swap rates (a key factor in fixed rate mortgage pricing) jumped sharply last week.

The alternative view, which is also widely held, is that with the economy still so weak, rate rises are not on the cards as they will stifle growth at such a delicate time.

While GDP was revised up from 0.2% to 0.3% in Quarter 1 of this year, its weakness supports the viewpoint that the economy needs a helping hand for the time being. The new tax policies of the new Government will also need to be in the public domain before the Bank of England will look to make any change to the Base Rate.

All in all there is no consensus among the experts and the economic indicators are inconclusive. Our guess is as good as the economists’ right now.

How does this affect mortgages?

Interest rate movements matter to mortgage borrowers because they are directly and indirectly linked to mortgage rates. If you have a tracker deal your pay rate is clearly linked to the Bank of England Base Rate as it tracks it at a set margin. An increase in Base Rate means a definite jump in your monthly repayments.

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Even those on discounted variable and standard variable rates are indirectly linked to the Base Rate. After all, how many people would like to stake a bet on the fact that lenders will pass on any rate increases to their SVR. I know I’d put a tenner on that.

Fixed rate borrowers have locked into their pay rate for a set period, of course, and this means they are protected from any rate rises during that time. That’s a great comfort for those with limited incomes who cannot afford a rise in repayments but, if rates remain low, those on fixed rates may feel they’ve been paying over the odds. After all fixes are currently priced higher than equivalent variable deals, which are super-cheap but come with the interest rate risk.

There is no right or wrong mortgage choice and the right option for you depends on your view on interest rates. More importantly, think about your own attitude to risk and your financial circumstances.

Whatever you go for, here are some of the best deals on the market today: 

15 top variable deals

Lender

Type of deal

Rate

Fee

Max LTV

Cheltenham & Gloucester

Two-year discounted variable

0.49% (Base minus 0.01%) until December 2010, 5.99% (Base plus 5.49%) for 19 months after

£994

90%

Alliance & Leicester

Two-year tracker

1.89% (Base plus 1.39%)

2%

70%

Halifax

Two-year tracker

1.99% (Base plus 1.49%)

2.5% of advance plus £245 completion fee

60%

Alliance & Leicester

Two-year tracker

1.99% (Base plus 1.49%)

2%

70%

Halifax

Two-year tracker

2.19% (base plus 1.69%

2.5% of advance plus £245 completion fee

60%

HSBC

Two-year discounted variable

2.29% (1.65% discount from HSBC’s Base Rate)

£499

70%

First Direct

Term tracker

2.39% (Base plus 1.89%)

£499

65%

Yorkshire Bank

Two-year variable

2.39% (Base plus 1.89%)

£995

75%

Earl Shilton BS

30 month Discounted variable

2.45% (2.5% discount from Earl Shilton’s SVR)

£599

75%

HSBC

Term tracker

2.49% (Base plus 1.99%)

£999

70%

Monmouthshire BS

Two-year discounted variable

2.69% (2.3% discount from Monmouthshire’s SVR)

£995

80%

ING Direct

Two-year tracker

2.79% (Base plus 2.29%

£945

80%

Britannia BS

Three-year tracker

3.19% (Base plus 2.69%)

£999

85%

Co-operative Bank

Three-year tracker

3.19% (Base plus 2.69%)

£999

85%

Darlington BS

Three-year discounted variable

4.24% (1.71% discount from lender’s SVR)

1% of advance plus £75 completion fee

90%

15 fabulous fixed rates

Lender

Type of deal

Rate

Fee

Max LTV

HSBC

Two-year fixed

2.49%

£999

70%

Alliance & Leicester

Two-year fixed

2.64%

2%

70%

Yorkshire Bank

Two-year fixed

2.95%

£995

75%

HSBC

Two-year fixed

2.99%

£999

80%

Accord Mortgages

Three-year fixed

3.64%

£1,995

75%

Alliance & Leicester

Three-year fixed

3.79%

2%

70%

Britannia BS

Five-year fixed

3.99%

£999

75%

Accord Mortgages

Five-year fixed

4.39%

0.5% of advance

75%

Post Office

Five-year fixed

4.75%

£999

80%

ING Direct

Five-year fixed

4.79%

£945

80%

Monmouthshire BS

Three-year fixed

4.99%

£799

80%

Accord Mortgages

Ten-year fixed rate

5.24%

£1,995

75%

Marsden BS

Ten-year fixed rate

5.39%

£598

80%

Accord Mortgages

Five-year fixed

5.44%

£1,995

85%

Accord Mortgages

Ten-year fixed

6.39%

£1,995

85%

More: Your home is worth more if you vote Tory! | Get a cheaper mortgage while you still can

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