The End is in Sight for Mortgage Rate Holiday

by Mark Johnston

Times have been great for borrowers over the past few years. Those on a tracker variable mortgage will have benefitted from the lowest base rate in history. The Bank of England have kept interest rates at 0.5% for almost two years. This has meant that many borrowers are on a standard variable rate of 3% or less which means literally hundreds of pounds less per month to pay on their monthly repayments.

Low interest rates have also resulted in the whole mortgage market offering better deals with fixed rates hitting record lows but this may well be about to change. One thing is for certain, interest rates will go up. The question on everyone’s lips is … when will rates go up and to what level.

Many experts believed that the base rate would remain at 0.5% well into 2011 to the threat of an increase is looming. Inflation is on the rise and if there is one thing that will get the Bank of England’s Monetary Policy Committee to raise interest rates it will be that. No one can predict what will actually happen although every industry experts, journalist and guy-next-door will have their own opinion. That said, it’s safe to say that it doesn’t take a genius to work out what the big boys think. Banks and Building Societies are already starting to increase the prices of the fixed rate mortgages and in some cases remove the cheapest from sale altogether.

The main reason for the increase in price is the wholesale cost of lending going up, or in particular the cost of swap rates. Back in November swap rates for a two year fixed was 1.26% whilst a five year fix was around 2.06%. Two months later those rates have shot up by almost 50%. The swap rate for a two year fix is now 1.79% and a five year fix is a whopping 2.91%.

With such large increase lenders have no choice but to pass the cost onto their customers. Large high street lenders like the Halifax, Co-operative Bank, Britannia and Skipton building societies have announced rate increases.

Inflation on the other hand is also rising and will force the Bank of England’s Monetary Policy Committee to raise to increase rates whether they like it or not. The governments inflation target is just 2% whilst the Consumer Price Inflation (CPI), the measure for used for tracking inflation is at a high of 3.7%. This is worrying for industry experts, the Bank of England and the government alike. It’s worth remembering that back in September 2010 inflation was just 1%, this might be the last nail in the coffin for the 0.5% base rate.

So, all eyes are on the Bank of England to see if they will stand fast with their current position and try and ride out the rise in inflation or whether they will increase rates in an attempt to get it closer to then 2% target.



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