Surely low mortgage rates won’t last forever… will they?
We get loads, in fact, pretty much ALL of our customers ask us what we think about rates and what is likely to happen in the future – ‘do we recommend a fixed rate or a tracker rate?’, ‘Should I tie myself into a long term or short term deal?’.
It’s a good question, and one that any financial adviser must meet with caution because really the truth is that no one knows what will happen with rates. Any advisor that sticks their neck out to predict the future leaves themselves open to complaint and is basically gambling with other peoples’ money!
If you were to say rates will stay low for 2 years and recommend everyone take tracker mortgages, then if rates increased customers may lose out compared to fixed rates.
If you were to say rates will go up in 2 years and recommend everyone take a fixed mortgage, then if they don’t increase customers may have paid over the odds during that time.
What does the market expect to happen?
The feeling is that as the Bank of England has announced rates will not increase until certain other factors are sorted out (such as inflation and unemployment), rates are not expected to increase anytime soon (although 'soon' is obviously subjective!). This doesn't mean that lenders won't put their rates up however, as the cost of borrowing to them depends on money markets and other factors to do with their own credit rating, but more measurably, the looming end to the funding for lending scheme.
This scheme was rolled out by the government to mobilise lending and help stimulate the economy back onto its feet. It is basically where banks and institutions can borrow from the Bank of England at a snip of a rate depending on their performance. This borrowing can be far cheaper than they have access to on the wholesale markets, and as a result they can afford to drop the rates for the consumer. This is one of the main reasons why mortgage rates are at a record low currently, with some deals offered out sub 1.5%. However, the scheme was only always set up as a short term financial measure, and despite already being extended once this year, it is currently set to run its course in Jan 2015.
It is at this point, that borrowing costs to lenders is likely to increase, and along with it the rates we all have access to - but there is no guarantee the government won't further extend the scheme or that other market factors effecting rates won't also have an influence on rates. Like I've said, nothing is certain and until we reach this point no one can say what affect this will have.
So if market experts and advisors can't tell me, what rate shall I take?!
This is purely down to your preference. If you are comfortable with the risk of rates increasing and can afford a higher outgoing if they did, then a tracker might be best as it could be cheaper to start with and if rates don’t move (although currently some fixed rates are amazingly cheaper than trackers!). Conversely, if you are averse to risk and like to know where you are every month so you can budget effectively, then a fixed rate may be better for you.