Going into 2011, Markets and Economists were predicting increases in the third quarter of this year, now there are suggestions that it could be July or August 2012 before the first increase. On one hand inflation is very high which would normal be a trigger to increase the rate but with the economy remaining so fragile with little signs of recovery, increases at this time could cause another full blown recession.
I am probably asked this question more than anything else when advising on mortgages and it is becoming harder and harder to predict. Speaking to lenders on a regular basis and observing the markets generally, I thought we would have at least one increase in the last quarter of this year and at least a couple more next year and end 2012 with a base rate of 1.5%. However, now all the signs are, that it could well be into 2012 before any increase at all. As well as the weak economy we also have the huge problem of thousands of mortgage holders unable to remortgage or do anything other than stay on their current lenders standard variable rate as they have little or no equity in their property and/or don’t have the income required to get a mortgage nowadays under the much stricter criteria used and lower loan to values. With little signs of any consistent or significant growth in house prices, this situation is not going to change any time soon. For those on a standard variable rate of 2.5% with Nationwide or C&G for instance the impact of an increase may not be too damaging but for those on variable rates of 4.5-5% (as is the case with several lenders) even small increases will have a huge impact on affordability and is likely to result in repossessions and undermine consumer confidence.
This would all suggest low rates for a long time and no increases at all until next year at least, unless the MPC feel they have to act if inflation continues soaring. This would be good news for mortgage holders and will hopefully buy some time where hopefully property prices will increase, although very bad news for savers, with no real hope of any decent returns on cash in the near future. Consequently, with variable and tracker available at around 2%, a two year deal would appear to have every chance of being a lower cost than fixed deal over the same period.
As the so called experts and economists can’t seem to decide when the base rate will increase, what chance do I have! I think whatever happens, any increases will be small and it is likely that rates will only begin to increase next year, perhaps increasing to 1/1.25% by the end of 2012. The economy is still so precarious that that I can’t see the Bank of England risking large scale repossessions and even a further recession until there are sure signs of recovery. However, we should all be aware that the current economic climate is unprecedented and the outlook for the future can change very quickly.
On the mortgage products side of things, lenders keep reducing rates, including some excellent Buy to Let offerings, it remains a fantastic time to obtain cheap funding with some great opportunities particularly for landlords or potential landlords. As always feel free to contact me for further details and guidance.
Simon Compton Cert PFS, Certs CII (MP & ER)
Independent Financial Adviser
Think Finance
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