Mortgage Rates could hit 8% this year
By Chris Gilchrist 25th April
2007
The unexpectedly large rise in inflation means the Bank of England is sure to
push through more increase in interest rates in coming months - so variable mortgage
rates could top 8%.
The Consumer Price Index is rising at an annual rate of over 3% while the broader
Retail Prices Index inflation rate is 4.8%. Though the Bank of England did not increase
rates last month, the City consensus is that it’s sure to do so in May. But will
it go for another quarter-percent rise or will it, as some in the City are now suggesting,
decide shock treatment is necessary and put rates up from 5.25% to 5.75%?
Either way, another rise in mortgage repayments in June now looks inevitable. And
the costs of escaping from rising variable rates have also risen, because the inflation
numbers have precipitated the withdrawal of a slew of fixed-rate mortgage offers
and their replacement with deals at higher rates. There are still two to five year
deals at about 5.25%, but many of the new deals are nearing 5.5% for a five-year
term.
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Could a capped rate mortgage deal be a good buy?
If rates do keep on rising, a capped rate mortgage could turn out a shrewd buy.
Even though the rate you pay at the start is higher than the going rate (around
5.3% currently), the interest rate is capped at 6% or a bit above, insulating you
from unaffordable rises later.
Some advisers suggest that the other alternative is to tough it out by switching
to a tracker mortgage with no redemption penalties, in the hope that rates peak
early next year. Personally I advise against this, as the signs so far are that
rising interest rates are not damping down consumer spending or the housing market
by anything like as much as the Bank of England expected.
Worryingly, data from Australia and New Zealand- economies further advanced in the
house price/interest rate cycle than the UK - suggest that even higher interest
rates may not actually slow the market sufficiently to bring the rate of inflation
down.
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The inflation genie is out of the bottle
All this accords with the experience of old-timers like myself, who know that once
the inflation genie is out of the bottle, it’s very hard to squeeze it back in again.
Since early 2005 I have been predicting that base rate would top 6% - and back then
the City consensus was that 5% would be enough.
Now, I think base rate is likely to go over 6% before the Bank is convinced it has
got inflation on a downwards trend, and I don’t think it likely that UK interest
rates will even start falling again till the middle of next year at the earliest.
That means that mortgage lenders’ Standard Variable Rates could be over 8% before
the end of the year.
So while fixed rate mortgages don’t look like the wonderful bargain they were six
months ago, a five-year fix at around 5.4% still seems pretty good value to me.
After all, that is less than 1% more than the current rate of inflation, so the
lender has to believe that inflation will fall sharply from 2008 onwards for them
to make money. On the other hand, if inflation stays higher longer, and so do base
rates, then it’s you who will win from taking the fixed rate bet.
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Article produced by EveryInvestor.co.uk
