Since 5th March 2009 the rate has been 0.5%, a record low. In the six years prior to then the rate was an average of around 4.45%.
Historically this was still pretty low but I think if the UK were to return to interest rates at that level then it would leave an awful lot of us in deep water.
While I don’t think rates are going to head that way in the foreseeable future it is important to think about how you could afford your mortgage if rates were to increase.
Are Interest Rates Going Up?
In the last two weeks or so we have seen conflicting reports come out of the Bank of England. The governor Mark Carney suggested that we are getting ever nearer to a rate rise only a couple of weeks ago. He wasn’t very specific however so if you take the literal meaning then yes, we are moving closer to a rate rise as we have yet to figure out how to make time stand still. His deputy Sir John Cunliffe has also said that rates are likely to go up,
“It seems that the next move on [interest rates] would be up and is also looks as if it will be a limited and gradual rise when it happens.”
Again we see he is suitably vague on timescales.
To contradict this we have the Chief Economist of the Bank of England, Andy Haldane, saying that rates might have to come down due to economic pressures outside the UK.
The above from those supposedly in the know is a little disconcerting as it gives us consumers very little comfort and ability to plan for the future.
Should You Consider Remortgaging?
Lots of mortgage holders are sat on competitive tracker deals that they may have taken out prior to the drop in interest rates back in 2009. So do you switch now to secure a fixed rate?
Well it clearly depends on the deal you have but many out there are on standard variable rates with lenders and have done nothing as their payments have remained affordable over the last few years. It is absolutely worth checking what you are paying now as there are some amazing low rates around at the moment.
As we have established, the experts at the Bank of England are not going to give you any clear guidance as to what sort of rate to go for, so you need to make some decisions yourself about what you think is important to you.
Do you want security?
Are you happy to pay a small premium for security? If that is you then the simple answer is take a fixed rate. The only thing you need worry about then is how long to take it over. In this case you need a pen and paper and a calculator. When comparing the rates look at the monthly payment, how much cheaper over two years is a two year deal versus a five year deal. You need to allow for an arrangement fee in two years time which could cancel out the savings on the monthly payments. Another thing to check is the outstanding balance in two years time on both the two year deal and the five year deal. One will be less than the other so this should be a factor in your decision.
For those that are less risk averse then you may want to look at a tracker rate mortgage, this will follow the Bank of England rate and as I have already said it has not changed for over six years. Tracker rate mortgages tend to be lower than fixed rates and you will need to check the KFI documents to see what effect a 1% rise will have on your payment. This will be an important factor in making the fixed v tracker rate decision.
Do you do a lifetime tracker or a shorter term one? Here I would look at what the lender’s view on existing customers would be, for example Woolwich (Barclays) will allow you to switch mortgage deal at the end of your current deal and you get the pick of their range. This process is pretty pain free and would negate the need to remortgage after your two year tracker (assuming the rates are competitive). If the lender doesn’t offer a simple rate switch service then maybe look at the difference in cost of the lifetime deal v the two year deal and get the pen, paper and calculator out again.
As ever the process can be a bit of a minefield so asking a broker can help with your decision.