Find out when interest rates will rise

Best buys for savers and borrowers in light of the lastest interest rate expectations.

We’ve been living with the fear (or hope) of interest rate rises for some time now. In fact it’s been 20 months since the Bank of England’s Monetary Policy Committee reduced its Base Rate to its lowest ever level -- 0.5%.

Few people thought it would stay so low for so long, but now it’s increasingly likely that it could remain at its current level a little longer.

Of course, the Base Rate impacts on much of our day-to-day finances, from savings to our mortgage, and our view on what’s going to happen to rates can affect our financial decisions.

However, second guessing interest rates comes with no guarantees. It is more sensible to go for a mortgage or savings product that meets your needs and circumstances, because the truth is nobody really knows what is going to happen next.

But we can have a good guess!

Rates on hold

In recent weeks it has become a little more likely that rates will stay on hold for longer than previously expected.

Predictions of a rise have been gradually pushed further back – at one point many believed we would get an increase by the end of 2010, then it was Q1 2011 and more recently summer 2011. Now though, many experts are saying rates could stay at 0.5% until the end of next year.

So why the change?

There has been a lone hawk in the Monetary Policy Committee since June -- Andrew Sentance -- who has been voting for a rate rise, as he thinks a gradual rise is better than a sharper one at a later date. However he is yet to convince any of the other eight members of the committee to vote with him.

The regular Reuters poll of economists now predicts that the first rate rise will not be until October 2011, at which point they could rise to 1%.

This looks about right to me too (for what it’s worth!). With Government spending cuts set to kick in as well as the VAT hike in January, the fragile recovery still needs support.

The new threat of European contagion affecting the UK economy, following the crisis in Ireland, also suggests slower growth which could keep rates low.

In addition, Mervyn King’s comments on publication of the Bank of England’s Inflation Report last week could be interpreted as suggesting ‘no change’ for some time yet. Despite saying that inflation will rise higher than previously expected in the coming months he did not say that the MPC would raise interest rates in response. Plus he predicted that inflation would fall back to target by 2012.

On balance I think it looks more likely that rates will stay low for much of 2011. So what does this mean for savers and borrowers?

Seeking returns

It’s not great news for savers who have been desperately awaiting a rate rise for some time now. For those who rely on their savings income, such as many pensioners, the current low rates are particularly galling.

Unfortunately they won’t improve soon if the economists are correct.

If you agree that rates will stay low until the end of next year you might be willing to lock up your savings in a one-year fixed savings bond (see tables below), and if you can stomach tying up your cash for longer the rates do improve.

If you must have instant access to your savings the rates are not brilliant, with nothing over 3%, before tax, so ensure you have used up your annual ISA allowance first.

It could also be worth considering holding some of your savings in one of the top paying current accounts, as explained by Neil Faulkner in Earn 5.8% on your easy access savings!

Below are the five top easy access savings accounts and the five top fixed rate bonds:

Top five easy access savings

*Only one penalty free withdrawal a year

Top five fixed term savings

Good news for borrowers

Of course, a low Base Rate is not bad news for everyone.

Mortgage borrowers will be pleased with the current presumption that rates will stay low for longer, as it means lower monthly repayments.

Rates are already historically very low (despite being at wide margins to Base Rate) and borrowers can find a host of stonking deals, as I explained recently in Why savvy switchers are remortgaging now. With trackers at less than 2%, two-year fixed rates at less than 2.7% and five-year fixes at under 3.7%, mortgage borrowers will be keeping their fingers crossed that the Bank of England continues its ‘wait and see’ approach for some time yet.

Of course, lower rates for longer could suggest that a cheap tracker rate, or even sitting tight on your lender’s standard variable rate, are sensible options, to minimise your repayments. However, others will still prefer to lock into a fixed rate deal in the understanding that there are no guarantees, and we could see a rise sooner than expected, as John Fitzsimons suggests in Fix your mortgage now – rates are rising.

Either way, below are the top five trackers and top five fixes for those borrowers with a decent deposit:

Top five trackers

Top five fixed rates

*Remortgage only

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online

Get help from lovemoney.com

If you need help getting the best mortgage use our resources.

First, adopt this goal: Cut the cost of your mortgage and pay it off early

Next, watch this video: Getting through the mortgage maze

Then, why not have a wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them?

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.