The Bank of England Base Rate will stay at 0.5% until next year, according to several leading economists. So if this turns out to be true, what does it mean for your finances?
1,274,400 is a very big number.
In miles, it’s 1,974 times the length of the UK. Or 51 times the distance around the equator. Or five times the distance to the moon.
And it’s also the number of minutes (roughly) that the Bank of England Base Rate has been sat at the historically low level of 0.5%.
But it’s not going to stay that way forever.
No change until 2012
Earlier this month the BBC asked 32 leading economists for their predictions into when the base rate would be upped. 26 forecasted that rates would not rise this year, while three predicted that there would be no change until 2013.
The most popular prediction for an increase in the base rate was the first quarter of 2012 – an option that 12 economists chose.
John Fitzsimons looks at three easy ways to reduce how much you are forking out on your mortgage each month
In addition, more than half of the forecasters also said they expected the base rate to rise to at least 1.5% by the end of 2012.
The full list of surveyed economists can be found on the BBC website.
So if the base rate does stay at 0.5% until the first quarter of 2012 or later – as a majority of the forecasters polled by the BBC expect – what does this mean for you and me? And what should we be doing before the rate is hiked?
Remortgagers
One sector that will be hit the hardest when the base rate rises is the mortgage market. Standard variable, tracker and discounted rates currently sat at next to nothing will shoot up and the cost of fixed term deals will inflate.
For homeowners currently on a low variable deal, it may be worthwhile to stay where you are and enjoy a few more months at a low rate. If you think that the base rate will rise in early 2012, that is.
However the problem with this is that the fixed rate mortgage market is currently extremely competitive. Just take a look at these fixed deals:
|
Product |
Term |
Max loan-to-value |
Rate |
Fee |
|
2 years |
60% |
2.39% |
£1,495 |
|
|
2 years |
75% |
2.59% |
£995 |
|
|
3 years |
70% |
2.89% |
£499 |
|
|
3 years |
75% |
2.94% |
£995 |
|
|
5 years |
70% |
3.39% |
£1,495 |
|
|
5 years |
75% |
3.49% |
£995 |
As you can see the Chelsea and Yorkshire building societies are currently offering some seriously low rates. The Chelsea also has a further five-year fixed deal priced at 3.99%, but with a fee of just £195.
The issue for those currently on a variable deal is that no one knows how long fixed rates will stay this low. When the base rate is eventually upped, you may want to be firmly locked in for a long time on one of these competitive fixed deals.
Yes, part of the reason the fixed market is so low at the moment is that the base rate is not expected to rise for a while. But still, these rates won’t be around forever and may suddenly change months before any base rate hike. If you decide to cling onto your tracker for a few more months, you could miss out.
New homebuyers
New buyers face a similar dilemma to remortgagers. Take a looks these variable rates:
|
Product |
Term |
Max loan-to-value |
Rate |
Fee |
|
2 year variable |
60% |
1.98% (1.48% + base rate) |
£1995 |
|
|
2 year variable |
70% |
1.99% (1.49% + base rate) |
£1,495 |
|
|
3 years variable |
75% |
2.29% ( 1.79% + base rate) |
£995 |
|
|
2 year discounted |
70% |
1.90% (1.60% below SVR) |
£1945 |
|
|
Lifetime tracker |
60% |
2.39% (1.89% + base rate) |
£945 |
|
|
Lifetime tracker |
70% |
2.59% (2.09% + base rate) |
£0 |
Temptingly low, don’t you think?
But again, if you do plump for a two or three year deal, what shape will the general mortgage market be in when you are looking to remortgage in 2014 or 15? And remember, if the base rate is upped in 2012, you’ll only be sat on your mortgage’s initial rate for around four months. Will you be able to afford the repayments if 1.5 or 2 percentage points are added onto your rate for the remaining 20 or 32 months of the deal?
If the answer to this is no, then you may be better off plumping for a long-term fixed rate that you know you can budget for every month.
[SPOTLIGHT]Of course, the alternative is to pick up a lifetime tracker mortgage now and attempt to shift out in three to four months time before the fixed market starts to price up. However if you miss the boat, you could be stuck with a pricey tracker in an inflated fixed term market.
But mortgages aren’t the only financial product that a base rate hike will affect...
Savings
A rise in the base rate will inject a much needed boost into the savings market. A welcome occurrence after so many years of miserably low rates!
But what should you do with your savings now, if you believe that the base rate will rise in early 2012?
Well, firstly you should avoid long-term fixed rate savings accounts at all costs. The last thing you want is to lock away your cash for three, four or five years, only to see rates rise four months down the line.
Instead, you should try and get hold of an easy access or one year fixed account. That way, when the savings market does pick up, you can switch out. Here are the best easy access and fixed deals around at the moment:
|
Account |
Term |
Interest rate (AER) |
Min. investment |
|
Easy access |
3.10% (2.56% bonus for 12 months) |
£1 |
|
|
Easy access (three free withdrawals per year) |
3.06% (1.06% bonus until 31/08/12) |
£1,000 |
|
|
Easy access (one free withdrawal per year) |
3.05% (1.51% bonus for the first 12 months) |
£1,000 |
|
|
1 year bond |
3.50% |
£1,000 |
|
|
1 year bond |
3.41% |
£500 |
|
|
1 year bond |
3.40% |
£1,000 |
Credit card debt
If you have large amounts of debt on a credit card, you’ll want to pay off as much as possible before a rise in the base rate. Credit card interest rates have been spiralling up over the last few years anyway, reaching a record average high of over 19% earlier this year. Just think what will happen when the base rate is also upped?
If you really can’t get rid of your debt, an alternative is to get hold of a 0% balance transfer credit card to shift the burden onto. This will cut your interest charges and give you longer to clear the balance. Head over to our credit card centre now to find the best deals.
Anyone’s guess
Of course, despite any number of predictions, the exact date of a base rate rise is still anyone’s guess. After all, no-one predicted the surprise cut to 0.5% back in 2009 and this time three months ago many of us were warning of an imminent hike.
So when do you think the Base Rate will rise?
Have your say in the comment box below.
More: Get a 0% credit card | The top ten 0% credit card deals | Fix your mortgage for longer without paying higher rate | Buy a house with 10% deposit or less