Should You Fix Your Mortgage Rate?

After last week's interest rate rise, we have to consider the effect on our mortgages. Specifically, we need to think about whether we should fix our interest rates.

It didn't take long for the major banks to start charging customers more after the Bank of England hiked up interest rates last week. This was the first base rate move in a year, so we have to consider whether there are more increases to come. If there are, then we should think about switching to fixed-rate mortgages.

Big mortgage lenders have a particular interest in which way rates are going. They therefore keep track not only of property prices, which can affect rate decisions, but other economic factors as well. For example, if prices of goods and services are rising too quickly, or they're expected to rise quickly, then interest rates are likely to go up to curb this.

Halifax Bank

The Halifax produces regular reports on house prices and interest rates and, in its most recent report dated the 3rd August, it admitted to being surprised about the current momentum of the housing market. More generally, the report mentions several times a strengthening UK economy, and increased pressures on finances, presumably from higher utility, food and petrol bills, and council tax rises.

Nationwide Building Society

In a report released earlier this week, the Nationwide announced an increase to its house price forecast for 2006, up from 0-3% to 5%. However, they also calculate that the overvaluation of house prices could be about 15%. This isn't catastrophic, but at some point this overvaluation will have to diminish.

The banks

The banks show their collective opinion with their LIBOR system, which shows that another rate rise is expected within a year. But LIBOR rates aren't infallible. The same banks that set them were taken aback by last week's rise.

Bank of England

As Mervyn King, the Bank of England governor, said earlier this year: "No one knows where interest rates are going.It's a mistake to try and get into this business of nods and winks of where interest rates may or may not go." The late economist J. K. Galbraith wouldn't argue.

Therefore, we should mostly base our decisions on what we know. We know that interest rates are still pretty low. We also know that prices are rising, in some areas quite quickly. One thing we can be darn sure of is that we all like stability, so we can budget better. With these things in mind, fixing interest rates would appear to be a sensible course of action.

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