`Base rate to stay low until 2015' - what to do now!

Here's what it means for you and your finances if the forecast of three more years of 0.5% base rate materialises.

It’s a birthday savers will be hoping never arrives: a sixth anniversary of rock bottom interest rates.

But unfortunately for devoted cash-stashers, more and more economists and commentators are lengthening their predictions of a rise in the official bank lending rate.

Among them is Vicky Redwood, UK Economist at the respected think tank Capital Economics. And prior to last Monday’s third anniversary of the Bank of England dropping the base rate to a historic low of 0.5%, she outlined in a video interview with lovemoney.com her forecast for the coming years.

She said: “The chances are pretty good of interest rates staying low. The economic recovery is still looking pretty fragile. Inflation is set to fall very sharply. Given all that, the Bank of England will probably want to keep interest rates very low for a good time yet.”

It’s important to emphasise that no one knows exactly when the base rate will budge from 0.5%. Indeed, three years ago, few predicted it to fall quite so low.

But still, a turning tide of forecasts pointing towards long-term low rates does present a few financial impacts and pointers.

Mortgage winners

The key winners from low interest rates are those with large levels of debt. In other words: mortgage borrowers.

The last year or two has seen the lowest mortgage rates on record with five year fixes plunging as low as 3.19%, lifetime tracks dipping below 2.5% and discounted deals dropping to less than 2%.

However, some mortgage prices have started to creep up over the past few weeks with RBS, Halifax, Clydesdale and Yorkshire Banks and the Bank of Ireland all upping their Standard Variable Rate (SVR). The explanation given by the lenders for these hikes was a change in funding costs. And the reason for this is up for debate – although my money would be on (an unfortunate expression in the circumstances) the Eurozone crisis.

Back in December I reported on the initial tremors of rate rises. Figures obtained at the time from Moneyfacts.co.uk revealed that most types of mortgage – with the notable exception of five year fixes – were ramping up in price.

That trend has continued through 2012 with the average rates for two and five year fixes as well as two year and lifetime trackers all increasing since December. The rises are most pronounced among short-term mortgages. The two-year fixed rate average has now increased every month since September, while the average for a two-year tracker has not fallen month-on-month since November.

So what does this mean for buyers attempting to get onto the housing ladder and those considering remortgaging?

Trackers

Well, a long-term low base rate means that variable mortgages will still offer the cheapest prices, even if they are increasing. However with SVRs creeping up, you should think long and hard about the type of variable deal that best suits your needs.

For a few months now I’ve been singing the praises of lifetime trackers as a relatively safe and sensible way of taking advantage of low interest rates. As the name suggests, lifetime trackers are pegged to the base rate – rising and falling with it – forever! So as long as the base rate stays at 0.5%, your mortgage rate will stay put as well.

In my book, this is far better than going for a two or three-year tracker – mortgages that will shunt you onto the lender’s SVR when the term ends.

However, going for any sort of tracker will always be something of a risk. After all, rates will rise eventually. This means that you should tack on a percentage point or two to any lifetime tracker interest rate when budgeting in repayments in order to avoid being stuck with an unaffordable product.

But of course, there is an alternative.

Five year fixes

Fixing your mortgage rate now will protect you from fluctuations in the variable market, allowing you to budget in repayments more accurately. But there’s still a choice to be made as to the type of fixed deal to go for.

Two and three year fixes offer the most competitive rates – most are below 3%. However there is the danger that this mortgage will leave you when you need it the most, in other words: just as the base rate rises and home loan market begins to price up.

Personally, five year fixed rates are currently so competitive, I can see few reasons not to pick one over a shorter deal (the obvious one being that you cannot be completely sure that you will stay in the property for five years).

Chelsea Building Society has the lowest rate: 3.19% with a maximum LTV of 70% and a fee of £1,495. The Post Office is offering 3.38% with a fee of £995 to borrowers with a 25% deposit. Market Harborough Building Society has a 3.99% rate with a £245 fee for those with a 20% deposit. Yorkshire Building Society has the best 90% LTV five-year fix: priced at 4.79% with a £995 fee.

Savers

Just as mortgage borrowers have prospered over the past three years, savers have suffered. And if the base rate stays low until 2015, so will returns on savers’ nest-eggs.

But how long you think the base rate will stay low for will affect how long you lock your savings away for. Opt for too long a term, and you could find yourself stuck with a pitiful return as market rates begin to ramp up. Personally, unless you’re sole ambition is to beat inflation (something you can only do with a five year account) – the maximum term bond I’d go for would be two to three years.

So here are the best savings deals around at the moment:

Account available through our savings centre.

Your take

Will the base rate stay at 0.5% until 2015?

Let us know what you think using the comment box below.

More: Now's the time to get a fixed rate mortgage | RBS/NatWest and Halifax raise mortgage rates