Interest rates are forecast to remain at record low levels for another 16 months, after the Bank of England signalled that the base rate would be “where it is now” throughout 2012 and its monetary policy committee voted unanimously this month to hold it at 0.5 per cent.
Analysts have said this will mean flat rates for the whole of next year, while Barclays Capital has predicted rates will be held for another two years. Some commentators have even suggested a cut in the base rate to 0.25 per cent, as the global downturn and the eurozone crisis weighs on UK economic growth.
For mortgage borrowers, this shift in interest rate forecasts has made cheap tracker mortgages look less expensive in the short term than fixed-rate deals.
Two-year trackers are currently the cheapest mortgages available, starting from 1.90 per cent, but brokers said lifetime trackers may prove a better option as they remove the need to remortgage and incur extra arrangement fees in two years’ time. ING Direct offers the cheapest lifetime tracker, which charges 2.39 per cent and comes with no early repayment charges.
However, brokers said there is still an argument for fixed rates as some of the cheapest ever fixed-rate mortgages are currently being offered.
“As fixed rates have got down to a level where the premium you have to pay is not that much compared to a variable rate mortgage, it comes down to human psychology,” said Ray Boulger of John Charcol. “It’s not just a question of working out what is the cheapest. Some borrowers prefer fixes because they like to know their biggest monthly payment is fixed for a while.”
He pointed out that lowest four-year fixed-rate is 2.99 per cent, just 60 basis points more expensive than ING’s best-buy lifetime tracker rate.
Accord Mortgages’ five-year hybrid tracker/fix deal could also prove an attractive option. This deal comprises a two-year tracker at 2.19 per cent - bank base rate plus 1.69 percentage points - followed by a three-year fix at 3.64 per cent. According to Boulger, the average rate of the deal would be 3.06 per cent if bank rate remains at 0.5 per cent for another two years.
“In my view this makes this product by far the best value for anyone who wants a five-year fixed rate, although of course they have to be prepared to accept a very small degree of risk on rate for the first two years,” said Boulger.
Meanwhile, savings experts have warned that banks and building societies are already removing their highest-paying accounts in anticipation of interest rates remaining low for longer than expected.
Savers are therefore being advised to snap up attractive deals when they are released, as they are unlikely to remain on the market for long.
“With a rate rise not expected for some time, savers who can afford to lock money away might also want to think about a fixed-rate bond,” said financial research firm Moneyfacts.
Leeds Building Society has a five-year fixed-rate bond paying 5 per cent, but limits deposits to £1,000. Taxpayers can earn a higher net return from Yorkshire Bank’s five-year individual savings account (Isa), paying 4.5 per cent tax free.
Rising inflation has made it even harder for savers to earn a real return on their cash. With the consumer prices index up 4.4 per cent in July, basic-rate taxpayers now need an Isa paying more than this, or a conventional account paying at least 5.5 per cent, to prevent their savings losing value.
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