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As the economic clouds darken, many now reckon we could see near-zero interest rates for years to come. Rupert Jones examines how it will affect your mortgage or savings
This week, for the 30th month in a row, the Bank of England held the base rate at 0.5%, and economists predict the first interest rate rise won't be until at least 2013. If we are now heading into a Japanese-style era of ultra-low rates to combat a depressed economy, is it time for households to fundamentally reappraise their personal finances?
As recently as the beginning of this year, the consensus view in the City was that "emergency" low rates would start to rise within months. In late January, the money markets were pricing in three 0.25% rate rises by the end of this year. It didn't happen.
Now the mood among financial experts has turned dramatically. Across the developed world, economic indicators are flashing red, and some forecasters believe the base rate will remain at its record low for many years.
The world's top central banker, Ben Bernanke, in charge of the US Federal Reserve, said last month he expects to keep US interest rates at current low levels until at least mid-2013. Many think the European Central Bank will reverse its two rate rises this year and make cuts as early as October as it battles the eurozone debt crisis. Against that backdrop, the chances of the Bank of England increasing rates look virtually nonexistent.
Guardian Money polled a number of experts to see what they think.
Ray Boulger at mortgage broker John Charcol: "I would see [the base rate] staying at 0.5% until mid-2013, and then only going up slowly."
Brian Hilliard, chief UK economist at Société Générale: His best guess for the next rate rise is "some time in 2013" – probably the early part of that year.
Martin Ellis, housing economist at the Halifax: "It's now looking increasingly likely we won't see a movement until some time in 2012." He believes predictions that the next rise won't be until 2013 are too pessimistic.
The Guardian's economics editor, Larry Elliott: "Even the most hawkish people in the City are talking about late 2012. I don't think there will be a rise while Mervyn King is governor of the Bank and he ends his term in the summer of 2013."
Howard Archer, chief UK and European economist at IHS Global Insight: "Whenever interest rates do start to rise, the probability remains that they will move up relatively gradually and remain very low compared with past norms."
So how does this translate into your finances?
I'm in the market for a new mortgage. Is a tracker the way to go?
There are still some very good tracker home loan deals on offer, particularly if you are looking to remortgage and have built up a decent amount of equity in your property. Borrowers in that position should be aiming to find a tracker deal priced at around 2.5%.
HSBC and ING Direct are both offering lifetime trackers with current pay rates of 2.49% (base rate plus 1.99% for the term of the mortgage) where the maximum loan is 60% of the property's value. The HSBC deal has no booking fee, while ING Direct's has a £945 fee.
The counter-argument is that many fixed-rate mortgage deals have come down in price lately and are looking a lot more attractive. If you can't afford to get the interest-rate guessing game wrong and/or you don't want to live with the fear of rates rising, however unlikely that may seem, fixing your monthly payments may be the way to go. Ultimately, the base rate will rise – it's just a case of when.
David Hollingworth at mortgage broker London & Country highlights Chelsea building society's five-year fixed-rate deal priced at 3.29% until 30 November 2016. For really long-term reassurance, how about a deal that fixes your payments until the end of 2021? The Chelsea also has a 10-year fixed deal priced at an attractive 3.99%. But in both cases the maximum loan is 70% and the product fee is a chunky £1,495.
I'm in a fix. Should I bail out?
Some of those who took out fixed-rate deals three or four years ago will be paying 5% or 6% – or even more in a few cases – and wondering if it makes sense to get out.
The big obstacle for many is the early repayment penalty charged if you ditch your current loan. Often, these are calculated as a percentage of the outstanding loan, and can easily be 3% or more. In many cases the penalty will be several thousand pounds.
Some people will definitely save by switching to a cheaper mortgage, even taking the penalty into account. But for others, the cost of escaping their current deal will be greater than the potential saving. As a rough rule of thumb, if the lock-in is two years or more, there is a good chance that switching will stack up financially, says Hollingworth. If it's less than a year, it is less likely you will gain.
The Guardian can help with the maths – our website features a mortgage switching calculator, provided by London & Country, which will give you an idea of whether it is worth paying the early repayment charge (ERC) to remortgage at a lower rate. Key in your current mortgage balance, interest rate and ERC, and how long the penalty has to run, and it will show you the interest rate you would need to achieve to make a switch worthwhile.
Take the example of someone with a £100,000 mortgage who is paying 5% interest, has a 3% ERC, and has three years to go until the charge ends. They need a rate of around 4% – assuming valuation and legal fees are paid by the new lender – which is perfectly achievable.
But if they only had one year to go until the charge ends, they would need to find a rate of 2% or less for a switch to be worthwhile.
Don't forget to factor in another potentially chunky cost associated with many new deals: the product fee. And remember that if you switch from a fixed rate to a variable one, and interest rates start to go back up, this will, of course, eat into any savings.
I think I'm on my lender's standard variable rate
You may be able to save thousands of pounds by remortgaging. Check what rate you are paying – you might get a shock. Despite the base rate having been 0.5% for ages, more than 20 lenders – most of them building societies – have standard variable rates (SVRs) that are north of 5%, according to financial data provider Moneyfacts. Krbs (Kent Reliance) has the highest SVR: 6.08%.
Others charging high rates include the Newcastle and Nottingham building societies (both 5.99%), West Bromwich building society (5.84%), Chelsea building society (5.79%) and Leeds building society (5.69%) .
You almost certainly won't be tied in by early repayment penalties.
What else can I do in the current climate?
Many borrowers are taking advantage of low interest rates by making mortgage overpayments. Overpaying can save you thousands of pounds in interest and shave years off your mortgage. Someone with a £150,000 mortgage with an interest rate of 3.5% who pays in an additional £100 a month would save more than £14,000 and lop four years and three months off the 25-year mortgage term.
Many mortgage deals will allow borrowers to overpay up to 10% of their outstanding home loan each year without penalty. That will probably be more than enough for most people.
But make sure you have enough money set aside to meet any emergencies. And if you have costly credit or store card debts, any spare money should probably go towards paying those off first.
Will first-time buyers benefit from all this?
There are a few mortgage deals aimed at buyers who can only manage a 5%-10% deposit. However, the most attractive rates are reserved for those who can put down bigger deposits. So the best advice is to do whatever you can to amass a decent sum, which will give you access to better deals.
Some commentators welcomed the news that a 100% mortgage has just been launched by new bank Aldermore, which offers its products through brokers.
However, its Family Guarantee Mortgage has an interest rate of 6.48%, fixed for three years, and borrowers must find a relative willing to guarantee any borrowing above 75%.
What about savers?
The extended period of lower lending costs spells more misery for pensioners and other savers, who will continue to suffer low returns on their money at a time when high inflation is eroding the value of their deposits.
To add to their woes, National Savings & Investments this week withdrew its popular index-linked savings certificates.
New Bank of England figures show savers have missed out on £43bn due to low interest rates, while mortgage borrowers have gained £51bn, the BBC reported.
However, the Moneysupermarket website insisted that, despite low interest rates, "we are seeing competition in the savings market, especially among the smaller players looking to attract new savers on to their books". It says the average rate of the top 10 "easy access" accounts has climbed to 3.09%. Meanwhile, the West Bromwich and Manchester building societies have launched accounts paying 3.17% and 3.31% respectively.
- Family finances
- Mortgage rates
- Mortgages
- First-time buyers
- Property
- Savings rates
- Savings
- Banks and building societies
- Interest rates
- Economics
Rupert Jones
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