Great news! Interest rates set to stay low for years

Rock bottom interest rates have been the saving grace of the downturn, and the good news is they could stay low for years.

Base rates may not rise at all until late 2011, according to The British Chamber of Commerce, and it could be four or five years before they return to more traditional levels.

That’s rubbish news for savers (although the situation isn’t hopeless - see below), but good news for the UK economy. So how can you cash in on low interest rates?

Recessionary rewards

The base rate have now been stuck at 0.5% for 16 months, which is just dandy for millions of homeowners. If you’ve kept your job, and have a variable rate mortgage, the credit crunch may have been an alarmingly rewarding experience. Weird.

Sadly, not everybody has benefited. The average SVR is a pricey 4.77%, almost 10 times base rate, while some SVRs top 6%. Many borrowers can’t switch to a cut-price deal because they are locked into a fixed rate, or don’t have the 25% deposit or spare equity they need to qualify for a market-leading deal.

But don’t despair, because the longer base rates stay low, the better your chances of grabbing a cheap mortgage. Your pricey fixed-rate might finally expire, you could pay off a chunk of your mortgage to lower your loan-to-value (LTV - that's your mortgage loan as a percentage of the value of your home), or lenders might start offering better deals at higher LTVs. Time is now on your side.

How has the recent swathe of rates cuts affected our attitudes toward saving, and can savers still secure a decent rate of return? Jane Baker investigates.

If your mortgage currently charges more than 4%, and you need to borrow more than 80% of your property’s value, you can already get a better deal by shopping around. ING Direct, for example, offers a lifetime tracker charging 2.84% up to 75% LTV, plus £945 arrangement fees. If you need to borrow 80% LTV, you pay a reasonable 3.54%.

Next stop 85% LTV?

To buy or not to buy?

For better or worse, low interest rates have spared us a house price crash. As I wrote here, prices may be sky-high in relation to earnings, but in relation to mortgage costs, they are more affordable now than they have been for seven years.

So provided you have a fat deposit and a squeaky clean credit record, the next two years may be a pretty good time to buy. I don’t mean as a short-term investment, but as a home to live in. We are now in a buyer’s market, so negotiate hard on the price, and let low interest rates do the rest of the work.

There is no panic, prices aren’t going anywhere. If you don’t have that fat deposit and spotless credit record now, I reckon you have two or three years to put that right before mortgage rates start rising again.

Saving grace

Low interest rates are bad news for savers, but they aren’t the end of the world. If you can afford to lock some of your money away, you can get a halfway decent run for your money. Northern Rock offers a postal account paying 4.05% fixed for three years, while Indian-owned ICICI Bank UK offers online savers 4.75% fixed for five years. With interest rates likely to stay low, you can take the chance of locking in.

Inflation has just fallen for the second successive month, to 3.2%. That should make those rates slightly better.

If you are prepared to take a punt on the stock market you could earn annual income of 5% or more, plus the scope for capital growth, by investing in dividend-paying blue-chip shares. Recent stock market falls have made share prices better value. A number of big-name companies now offer healthy yields, including Aviva (6.9%), Glaxo (5.34%), Shell (6.3%), Tesco (3.3%) and Vodafone (5.8%).

Pay down your debts

Low interest rates are a great opportunity to chuck any extra surplus cash at your debts. Don’t squander this opportunity, servicing your debts will only get harder when interest rates eventually do rise.

Base desires

If base rates were at 5% rather than 0.5%, life would be much harder for (nearly) all of us. More companies would have folded, more people would have lost their jobs, more homes would have being repossessed, and more people would have gone bankrupt. The pound might be higher as well, hitting exports.

Low interest rates have saved our bacon. With apologies to savers, we should hope they continue to do so for some years to come. And it looks increasingly likely that they will. So make the most of it.

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