Homeowners are being warned to prepare for rising interest rates as surging inflation makes a rise in the Bank rate increasingly likely. “It looks a racing cert that, with inflation running away from the Bank’s target range, rates will rise and soon,” says The Independent. The questions then are how fast rates will rise and whether that means you should fix your mortgage or not. The money markets are predicting a base rate of only 1% by the end of this year, around 2.25% at the start of 2013 and 3% by 2014, says Simon Lambert on Thisismoney.co.uk. That suggests that rates aren’t going to rise fast – and that whether you should fix or not depends, as ever, on what you can afford.
If a small rise in your payments could leave you struggling, you should definitely consider fixing now. Taking out a fixed rate now will cost you more than sticking with a variable rate, but it will protect you when rates rise. Don’t forget that a rise in rates from 1% to 3% represents a tripling of base rates. That doesn’t mean your payments will triple – that depends on the rate you have now. But it certainly will make a major difference.
Santander tops the best-buy tables for two-year fixes with a rate of 2.65%. You’ll need a deposit of at least 40%, though, and the fee is a fairly extreme £1,995. However, if you fix for two years, you are leaving yourself open to a shock rise in repayments when the fix runs out. Clydesdale Bank is offering a five-year fixed rate at 4.29% with a maximum loan to value (LTV) ratio of 65% and a £999 fee.
Given the gap between tracker rates and fixed rates, those who can afford it might take a gamble and stick with a tracker mortgage. The best rate available is 1.99% with First Direct’s two-year tracker, available to borrowers with a 35% deposit and a £999 fee. Another option is a capped tracker. These offer the best of both worlds. You get a mortgage that tracks the base rate, but is capped so you know what the maximum you could end up paying is. Given that these are lose/lose for the lender, there are very few around. Coventry Building Society is currently offering a two-year tracker at 1.99% above the base rate, capped at 4.39%. It has a maximum LTV of 65% and a £999 fee.
Finally, anyone with savings might consider switching to an offset mortgage. That way you can use your savings to reduce the interest you are paying on your mortgage – which, given the low rates available on savings, could be more profitable than sticking with a traditional savings account. First Direct offers a two-year fixed-rate offset mortgage with a rate of 3.19%, with an arrangement fee of £1,499 and a maximum LTV of 65%. They also offer a 2.29% two-year tracker mortgage with a £999 arrangement fee.