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.
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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 |
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% |
|
Two-year tracker |
1.89% (Base plus 1.39%) |
2% |
70% |
|
Two-year tracker |
1.99% (Base plus 1.49%) |
2.5% of advance plus £245 completion fee |
60% |
|
Two-year tracker |
1.99% (Base plus 1.49%) |
2% |
70% |
|
Two-year tracker |
2.19% (base plus 1.69% |
2.5% of advance plus £245 completion fee |
60% |
|
Two-year discounted variable |
2.29% (1.65% discount from HSBC’s Base Rate) |
£499 |
70% |
|
Term tracker |
2.39% (Base plus 1.89%) |
£499 |
65% |
|
Two-year variable |
2.39% (Base plus 1.89%) |
£995 |
75% |
|
30 month Discounted variable |
2.45% (2.5% discount from Earl Shilton’s SVR) |
£599 |
75% |
|
Term tracker |
2.49% (Base plus 1.99%) |
£999 |
70% |
|
Two-year discounted variable |
2.69% (2.3% discount from Monmouthshire’s SVR) |
£995 |
80% |
|
Two-year tracker |
2.79% (Base plus 2.29% |
£945 |
80% |
|
Three-year tracker |
3.19% (Base plus 2.69%) |
£999 |
85% |
|
Three-year tracker |
3.19% (Base plus 2.69%) |
£999 |
85% |
|
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 |
Two-year fixed |
2.49% |
£999 |
70% |
|
Two-year fixed |
2.64% |
2% |
70% |
|
Two-year fixed |
2.95% |
£995 |
75% |
|
Two-year fixed |
2.99% |
£999 |
80% |
|
Three-year fixed |
3.64% |
£1,995 |
75% |
|
Three-year fixed |
3.79% |
2% |
70% |
|
Five-year fixed |
3.99% |
£999 |
75% |
|
Five-year fixed |
4.39% |
0.5% of advance |
75% |
|
Five-year fixed |
4.75% |
£999 |
80% |
|
Five-year fixed |
4.79% |
£945 |
80% |
|
Three-year fixed |
4.99% |
£799 |
80% |
|
Ten-year fixed rate |
5.24% |
£1,995 |
75% |
|
Ten-year fixed rate |
5.39% |
£598 |
80% |
|
Five-year fixed |
5.44% |
£1,995 |
85% |
|
Ten-year fixed |
6.39% |
£1,995 |
85% |
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