Base Rates Remain at Record Low

by Mark Johnston

With the Bank of England base rate remaining at a record low since March 2007 the question on most savers and borrowers lips is when will rates rise.

The Monetary Policy Committee (MPC) voted in June this year to keep the base rate on hold at 0.5%. But after more than 24 months of flat interest rates it is now time for borrowers and savers alike to start preparing for the inevitable rate increase.

Paul Fisher, executive director of markets states that “what we need to do is to trigger the mindset in people that rates will eventually go back”.

The average prediction both inside and outside the city is that the Bank of England will raise the rate to 1%, some have even predicted it to be higher at 2%.

Mervyn King, the Bank of England governor has warned “anyone making a long term financial decision should not expect the base rate to be at these low rates indefinitely”.

Many savers will be grateful for any rise, but home owners with already stretched budgets will dread an increase to their monthly mortgage payments.

Expert economists predict that people with variable mortgages or even tracker mortgages could see a big rise in their repayments with in a year or two. They therefore suggest that if a rate increase, no matter how slight, would make mortgage payments unmanageable, it is now the time to start looking for a fixed rate deal.

Many families have been hit hard by the collapse in living standards, which has been the steepest in 80 years. The vast majority of those hit were in no way responsible for the event of the financial crisis, yet they are now suffering a ‘squeeze’ on real living standards for which the current rate of inflation is the obvious symptom along with the 15% increase in gas and oil prices and the 20% rise in food prices.

When the rates do rise the projection for the number of people falling behind on loan payments could get ‘scary’ some experts suggest.

On current wages, if rates were at 5% households would be spending more of their disposable income on debt interest than at any time in the past 20 years.

Household debt in the UK is £1.45 trillion, of which £1.2 trillion is mortgage borrowing.

Most lenders, especially building societies welcome a rise in interest rates as it is hard at the moment to attract savers. In the past 10 months building societies have seen a net outflow of savers funds.

Due to the low base rate many savers have chosen to spend their money, pay off other debts or save elsewhere with state backed organisations. Unfortunately with out savers money coming in many building societies ability to lend to buyers has been severely restricted.

Experts suggest that when the base rate does go up then saving rates will rise too, however putting savings in a fixed bond right now is not the best option. It is advisable for savers to adopt a ‘wait and see’ approach.

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