So I’m just trying to get a new mortgage, which is a bit complicated in these troubled times. The question is whether I go for a fixed rate or a tracker (both over 2 years). At the moment the monthly payment would be about the same, but if the interest rates continues to drop I’d save a lot of money with a tracker. However, if it goes above the present rate I’d have a tough time affording the payments. A fixed rate would mean I knew where I stood.
So any (informed) predictions on what the base rate will do in the next couple of years? Should I risk the tracker? I have a friend who is a producer of a TV channel’s business news, and he says that the buzz is that the base rate will drop to US levels (2%) by this time next year. If so that’d be great. Is this reliable? Can you quantify the risk?
UK Base Rate will drop and stay low. The Bank of England moves pretty slowly (witness the slow pace of the rate falling), and at the moment they will be trying to limit the recession as inflation becomes less of an issue. So it will keep falling for a bit, and will climb very slowly.
Go for the tracker, but shop around and get one that is firmly linked to the BoE Base Rate, and does not have too big a margin added. Some banks are not passing the full rate cuts to customers, to rebuild profit levels.
What kind of time frame are we talking? And how do you know? (I don’t mean to be rude with that last one!)
I don’t think I’m going to get much choice as I’m earning very little at the moment. The ones I’ve been recommended are 1.19% above the Base Rate. Is this ok?
No offence. I am not an economist, but I do listen to the early morning business reports on the BBC, and the consensus (of business community interviewees) is that the BoE will start accounting for the recession, that the recession will last at least two years, and that there is a small risk of deflationary pressure that will also act to keep rates low. Some members of the Monetary Policy Committee have complained about the deeply conservative approach - change slowly and watch - so I don’t really see that changing over the next 2-4 years. If they make a drastic rate cut on Thursday, rates should stay low for at least a couple of years.
But (of course), this is only my opinion. You need to make a judgement based on your circumstances. A fixed, budgeted payment for the next two years may be more suited to your economic situation.
I don’t really know, as I have not looked recently - I hear about the trends, not look at the specifics.
Lenders tend to bury a minimum lending rate for customers in the small print of any mortgage agreement. HBOS will not cut tracker rates if the bank rate falls below 3 per cent. The Nationwide will also refuse to pass on any decreases if the base rate sinks lower than 2.75 per cent.
For example, anyone holding an HBOS tracker mortgage will be affected like so:
Thanks for pointing that out. I think the ones I’m looking at are ok, but will double check. Also the link confirms what I’d heard about the base rate dropping to 2% next year.
Anyone who claims to be able to predict interest rates with any certainty is either a fool or a liar. Which means, very sadly, that you’re being asked to decide how pay for your biggest investment based on nothing much more than luck.
Like other posters, I feel that the likelihood is that rates will fall, and stay low. But, obviously, anything can happen. How many ordinary people forecasted this current economic meltdown?
If peace of mind is your priority, then a fixed rate is the one to go for. If you’re a gambler, then a tracker. But, as I’ve said, it’s not good that you are supposed to decide your financial future based on not much more than a guess.
I’m supposed to be an economist, which means I’ll probably disagree with all other economists.
At the moment (10:00 GMT) the base rate is 4.5% in the UK, today it will drop by 0.5% or 1% - very little of that reduction will be passed on by the banks - quite sensibly they are trying to build up in house funds - by squeezing their customers.
I consider it extremely unlikely that the UK base rate will fall below 3% and I consider 3% pretty unlikely - part of the reason is that the UK is dead scared of inflation, and another part is that in the UK interest rates are not that important - compared with availability of credit. The UK population quite correctly decided that ‘jam today’ is better than ‘jam tomorrow’, so they’ll borrow at ridiculous rates of interest.
As for tracker versus fixed rate, the first thing I would be looking for is ‘arrangement fees’ and other sneaky extras. The next thing is that I would not consider a 2 year fixed rate as particularly fixed. It just means that in 2 years one has to go through the hassle and expense of remortgaging - or slip onto the lenders standard variable rate.
If I had a healthy amount in the bank, I would look at a combined bank a/c mortgage - otherwise I would look at a reputable lender (preferably a mutual) and go for a variable rate. Mortgages hurt for the first few years, especially if interest rates double, but after a bit they become an annoying monthly expenditure - but not one that is make or break.
In my experience, trying to be clever to save a bit, costs a lot more in the long run - the good deals come with a sting in the tail. Your friendly mortgage broker is not your friend - and most lenders are profit maximizers - and pretty ruthless.
I’m sorry **FRDE **- I had to laugh :p. I know it’s not fair, but that’s just what I meant about predicting. Not that I consider you a fool or a liar - says he hastily - just that, particularly nowadays, it’s just so damned difficult.
What I really need now is an informed opinion / wild guess on when interest rates will go up again. I could probably afford a tracker up to about a 5% base rate. In the mean time I’d be saving a heap of cash.
Brass tacks: is the base rate going to go above this in the next 2-3 years?
No, it is Ok, I doubt that many economists expected such a dramatic move, for example The Times have 67 economists ‘mirroring’ the MPC - and none of them predicted the 1.5% drop.
Actually it was quite a smart move. The markets probably expected a staged lowering of the rate - and expectations tend to determine what they do, rather than what the market is like at a particular point in time. For example, if you expect GBP to fall against USD, then you tend to get out of GBP.
I seriously doubt that the UK Base Rate will fall below 3% (which inviting providence means it probably will ) part of the rationale is that we are not used to rates as low as 3% - let alone 2.5% - so it is not easy to predict what savers (UK and overseas) would do - but you can be sure that it would be pretty nasty.
To the OP, I strongly recommend that you find a relatively benign lender, if you can get a Cap on the rate then so much the better, but regardless, the thing is to avoid building up problems for about 2 years time.
What looks like a good deal generally has a sting in the tail. That sting may not be obvious - but it will be there.
) part of the rationale is that we are not used to rates as low as 3% - let alone 2.5% - so it is not easy to predict what savers (UK and overseas) would do - but you can be sure that it would be pretty nasty.