Wednesday 13 January 2010

Mortgage interest rates?

I am personally very interested to have my best guess at where UK interest rates are heading in the intermediate term. This is because I am about to come off a fixed rate mortgage deal in the next few months, so clearly I want to choose between just automatically rolling onto the Abbey's Standard Variable Rate (SVR) for a while, locking into another fixed rate deal, or getting tooled up with a Tracker.

First up, my gut feeling is Tracker rates can't possibly go much lower, no matter how lucky I might feel. The lender's margin on Trackers is fixed for the duration, so you know that your rate deviation will always exactly track the changes at the BoE. The BoE base rate is 0.5% -- how much lower can they drop that, and how likely is it they would do so? Answers I give myself here are: nothing significant (something less than 0.5%), and extremely unlikely unless they really do want to set a fire under the Pound and finally kill it once and for all. So, a Tracker seems to be out of the question at this juncture. The only way is up, and your exposure is unlimited.

Next up we have living with the SVR. This is a dangerous beast in my opinion, because not only can the BoE base rate that it is ultimately based on go up, but the margin spread that each lender applies to the base rate can and does vary too. My feeling is that not only is it unlikely that the BoE base rate goes down from here to my benefit, but it's unlikely the Abbey are going to cut the margin they make for lending money any time soon and in fact there is a very good chance in my mind that they will ask for a larger margin for the risk involved. So to put it bluntly, this seems to me to be an even worse option than a Tracker -- at least with a Tracker any rises will likely be modest, but on an SVR they will be amplified to some degree by the lender's margin. So, staying on the SVR for any length of time seems to be out of the question unless the costs of entering some other deal are prohibitive.

By a process of ellimination, this leaves only the option to fix, assuming a decent rate is available and for a duration that is attractive, and for a reasonable booking fee. There are currently pretty decent rates on 2 year fixes, nearly as good on 3 year, but 4 and 5 year fixes are starting to get pricey. If you fix too long, it will cost a fortune to get out of the deal (I fixed for 5 years last time, and have regretted that since year 3 as it turned out!), but if you fix too short you may have the shock of coming out into harsh conditions. A tough decision always.

To help with the view on most likely future rate direction, I borrow the BoE's own crystal ball, from their latest inflation report available at I include Chart 1, their fan chart of expectations, from that report here. You can see from this chart that the BoE expect the economy to expand over the next year or so, and it appears they are anticipating contraction to recommence as we head into 2011 but a much lesser one than in 2008. This suggests to me that we can look forward to interest rates rising this year, and then perhaps being stable to down in 2011 (on current forecast data). This is of course with the caveat that the BoE aren't always correct, as witnessed by their reports from say 2005 or 2006. Who can know with any certainty what will happen in the years ahead?

So that means on current information the safest bet appears to be a 2 year fixed rate. Now, iff only the booking fee is reasonable...

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