Are You Ready For an Interest Rate Rise?

by Mark Johnston

A rise in interest rates from the 0.5% record low, may come as a shock for most borrowers. Most analysts now believe that the Bank of England interest rate will rise next year with a few even predicting that the increase with be seen as early as Spring.

Borrowers are starting to move from variable and tracker mortgages back onto fixed rate products to try and protect themselves from future rises in interest rates.

Andrew Montlake of the Coreco Group provided some guidance by saying: “As rates have fallen to historical lows people should be taking advantage of some of the attractive fixed rates on offer. While it is nice to be on a low tracker rate, this can change quickly and people have to be sure they can afford not just a 1 per cent rise, but possibly a 2 per cent rise in rates over the next year or two.”

ING Direct launched a five year fixed rate mortgage at 3.69% but its only offered to those who have at least a 60% deposit as the loan to value (LTV) is 60 percent and its fee is on the high side at £1,945. With the base rate still at historic lows lenders are dropping their fixed rate products. There have been several big players drop their rates and numerous deals for fixed rate mortgages. The average 2 year deal is just 4.4% whilst longer term three and five year products are around 5.05% which is a fall from 5.35%.

The great thing about fixing is borrowers know exactly how much their monthly payments are going to be. This really helps when budgeting especially when money UK home owners are worried about money and job security. The downfall is that rates may still stay low for the medium term so borrowers on a fixed rate may end up paying much more than they need to.

Some people are concerned that interest rates will not only rise but rise quickly and to levels as high as five or even seven percent. Drew Wotherspoon of mortgage advisers John Charcol. “The chances of rate rises has arguably receded further over the last month or so, with the general recovery weakening and the focus of the MPC turning toward printing more money. I expect the first rate rise to come towards the end of 2011, but for any increases to be very gradual over the coming years. We simply cannot see the big rises some commentators are forecasting,”

David Hollingworth a broker at rivals London & Country Mortgages agreed with Mr Wotherspoon by saying: “But the only direction that base rate will move is up and so borrowers should be considering how they will approach the situation and how well they will cope when the time comes,”

The gap between the very best variable rate at 2.5 per cent and ING’s five year fix at 3.69 per cent is now slim which strengthens the argument for fixing. “Only the most bearish would suggest that rates will not rise by more than 1.19 per cent over the next three years,” says Andrew Montlake. “A little extra cost now could save many a sleepless night in the future.”

Melanie Bien, an independent mortgage said: “If you wait until interest rates are rising before you fix, you will pay more than you would now, because the pricing of new fixed rates rises accordingly,” Trying to time the market and an interest-rate rise is a mug’s game; you should really opt for a mortgage that suits your particular circumstances. So if you are on a tight budget and like certainty, a fixed rate makes sense. If you can afford fluctuations in interest rates, a base-rate tracker may be cheaper at least initially. Or consider the best of both worlds – a tracker mortgage with the option to switch to a fixed rate at any time, without penalty,”

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