Mortgage rates will rise – eventually, warns Duncan Farmer, so make moves now to soften the blow.
Every cloud has a silver lining and the big black ones that brought snow and chaos to the country three months ago are at least in part responsible for the Bank of England’s decision to leave interest rates at 0.5 per cent at its most recent meeting.
The snow and ice kept most indoors and, crucially, away from the High Street, thus leaving the economy shivering and in no state to take the shock of an interest rate rise.
Welcome as that decision was it was a postponement rather than a cancellation and most experts agree that rates will rise this year and probably next, too.
Writing in The Daily Telegraph, Roger Bootle, of Capital Economics, who has been one of the most consistently accurate forecasters, said: “Readers should not be fooled by the immediate pause in rate rises into thinking that the prospect of higher rates had gone away. Both individuals and companies should be preparing for much higher interest rates ahead.” By “much higher” he predicts that 3 per cent is the eventual peak.
So what would that mean for mortgages? The Halifax standard variable is 3.99 per cent today, which means that a borrower with a £300,000 repayment mortgage pays £1,581 a month. Should that rate rise by 3 points to 6.99 per cent the monthly repayments would be £2,119.
That does seem quite a jump and although the expectation is that such high rates are a couple of years away there is plenty that borrowers can do to soften the blow. Either, use any spare cash to pay off a little bit extra of your existing mortgage now so that when rates did rise you would at least be paying interest on a smaller capital sum, or switch to a cheaper fixed rate loan.
For example, Yorkshire Building Society has a two-year fixed-rate loan with an interest rate of 1.36 percent, bring repayments on a £300,000 loan down to £1,180, and HSBC charges 1.62 percent on a three-year mortgage, making repayments £1,217.
Fixing for five years with HSBC would be more expensive, at 2.44 per cent, but still cheaper than today’s standard variable rate and a bargain should the Bank rate hit 3 per cent any time soon.