What the future holds for mortgage rates

Thinking of getting a new mortgage? Find out what the experts think will happen to rates this year.

This year, mortgages will be much more affordable. The economy is going to completely recover, credit is finally going to ease, and there will never be a better time to get a tracker mortgage ....unless of course rates rise stratospherically, legislation squeezes the supply of credit still further, and those who bought into fixed rates will be sitting pretty.

Playing 'guess the future of the mortgage market' is an annual tradition. There's often a fair amount of agreement, which helps people looking for a mortgage to make a decision about the best kind to go for. This year, however, it seems that every expert has a different view.

How will interest rates affect your mortgage?

There are those who think low rates are here to stay. Last week, for example, Roger Bootle, managing director of research company Capital Economics, forecast that the bank rate wouldn't go above 1% in the next 5 years. Bootle has a reputation for standing out from the crowd, but he is not alone in predicting continued low rates.

Most of those in the low rate camp, however, think rates will start to rise by the end of the year. L&G has forecast rates will remain at 0.5% for all of 2010, at which point rises will begin, and Howard Archer of IHS Global Insight agrees. If these pundits are right, then perhaps a base rate tracker is worth considering.

Others believe rises will come a little earlier. A poll of economists by Reuters said the first rise will be in October, while a survey by Bloomberg forecast rates would rise to 1.25% by the end of 2010. Others are pinning their forecasting reputations on rises coming earlier still. Simon Ward, chief executive of Henderson New Star, reckons March could see the first rise.

Can you afford a mortgage tracker?

If you agree with these experts, you need to work out whether you can afford to meet mortgage repayments when they increase, and if not, you need to fix. This calculation of course depends on how much rates will rise. The general consensus here is that rises will be modest. For those who follow the swap markets, the numbers in the middle of January suggested that rates will be 0.92% in one year,1.88% in two years and 3.33% in five years.

However, there remains the possibility that the quantitative easing programme may be bungled, inflation may soar, and so rates may need to go up far faster. Another consensus in the market is that thisf is the biggest unknown. Ted Scott, a senior fund manager with F&C says: "Inflation is quite a risk this year, we just don't know when it is going to come and how fast it is going to be." If this risk particularly worries you, then now would be the time to fix.

Some mortgages are getting cheaper...

The good news is, competition is increasing in the mortgage market. In recent weeks Yorkshire Building Society, Halifax, HSBC, Chelsea, Nationwide and Coventry Building Society all announced rate cuts. There has been an increase in mortgages for those with relatively small deposits and additional competition in this sector of the market has pushed some rates and arrangement fees lower here too.

Added to this, lenders are far less dependent on swap rates for their new funding and are looking toward their savers to balance the books. This has had the effect of lowering prices, and as we look to salt away more cash, this could help free up supply still further.

...But mortgage rates could still go up

On the other hand, some aspects of the market are working to hike rates. A few mortgage companies have raised their standard variable rate. Marsden Building Society raised its SVR almost half a percentage point, from 5.49% to 5.95%, while Mansfield, hiked it from 5.24% to 5.59%. Cambridge, Kent Reliance, Scottish and Accord have increased their SVRs by at least 0.25 of a percentage point since the middle of last year,

Nigel Quinton, Mansfield's chief executive, has blamed having to compete for mortgage and savings business with those financial institutions subsidised by taxpayers. But the fact is, raising their SVRs means more profit for the lenders.

The impact of legislation on mortgages

New legislation may also have an impact on mortgage rates. The Financial Services Authority outlined reforms in its Mortgage Market Review, which could yet shut down the market. Paul Samter, economist at the Council of Mortgage Lenders, warns: "The prospect of tighter regulation of the financial services market, including more expensive capital requirements and a more prescriptive approach by the regulator, will inevitably act as a brake on the flow of mortgage credit."

So what's going to happen next?

Much as I'd love to tell you, the fact is, it simply isn't possible to tell what is going to happen next, or to strategically pick the mortgage that will help you weather the storm. In the end you have to have to make a choice that you can live with - even if you're wrong.

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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.