Faced with the barrage of news headlines in almost every paper today about raging inflation leading to soaring interest rates, we thought it was prudent to bring a sense of calmness to the media storm.
The question we have been asked most lately is whether to fix or not and I have for a long time now stated that I believe more people should be seeking the sanctuary of fixed rates than actually have done.
So in a rational and calm way, whilst I believe rates will rise sooner than many they will not go to 5% by the end of the year, here are my views together with some examples of the fixed rates available at present.
I cannot believe that the MPC will be able to “ignore” inflation, which is the only job they are actually detailed to do, for too much longer. Unless things really do get much worse due to deepening Euro issues or some other unforeseen circumstance, just for cyclical reasons I believe as we get closer to 2012 and certainly by mid 2012 and 2013 we will be into a period of sustainable growth.
I suspect that because of the current economic environment rates will creep up rather than shoot up, with the first rise coming by May and ending the year 1% higher than it is now. Remember, the Monetary Policy Committee can always reduce rates again if they need to.
As the markets work ahead of any actual changes it is likely that rates will have to begin rising soon to peg inflation and we will head towards a more “normal” Bank Base of between 4% and 6% over the next 3 years or so. If things overshoot and inflation proves to be even stronger, bolstered by the unknown effects of QE, as an example, then the downside could be even higher interest rates.
We have seen both SWAP rates and therefore lenders fixed rates steadily edge up over the past couple of months and I think this may continue unless something changes in the economic outlook, probably for the worse, that makes everyone believe the recovery really is not coming yet. The best 5 year rate was 3.69% a couple of months ago as an example, now that same lender offers 4.09%.
Those lenders that have not yet increased their fixed rates look set to do so soon. Increased competition from lenders is still muted so unlikely to have an effect of driving down fixes again. There could always be one or two who break the mould to gain market share but they have no need to go too low in this market.
In general the closer we get to a rate rise the higher fixed rates tend to creep, so waiting until an actual rise takes place may be too late for the best products.
Taking a 2 year product, unless you need the flexibility to repay a vast chunk in 2 years time, means that you could be looking to remortgage again relatively quickly in a higher, rising interest rate environment where a 5% or even 6% fix may look competitive!
In other words the risk of losing on a tracker over the next 5 years, as well as the potential downside cost (as there is an unlimited loss), seems to be much greater than the risk of taking a fixed and losing out if rates stay low (as there is a smaller defined loss). Especially, if the difference is only 1% to 2%.
I can only say what I would do myself, and if I could take 5 years fixed at around 4% now I would bite your hand off for it, sit back and relax, overpaying when I could.
Those who managed to get on the 3.69% are likely to be feeling pretty smug!
In terms of products the following are a guide to what is currently available :-
2 year fixed – 2.65% fixed until 02/03/2013, (4.24% APR)
3 year fixed – 3.29% fixed until 28/02/2014, (5.30% APR)
5 year fixed – 3.95% fixed until 30/04/2016, (4.10% APR)
Alternatively Coventry has an interesting tracker rate product starting at 2.25%, (4.30% APR) which is capped at 3.49% until 31/03/2013.
For more information on how inflation can affect your mortgage take a look at our guide.