Interest rates are back in the news – and whether they should rise from 0.25 per cent sooner rather than later. The Bank of England’s chief economist Andy Haldane said last week that he could soon change his position on the rate setting committee from hold to rise. His comments came just a day after Governor Mark Carney warned that now is not the time to raise rates.
So what should borrowers think and what should they do? We still think an interest rate rise remains some way away. There is still too much uncertainty around, both politically and otherwise. The housing market is soft, particularly at the top end.
However, borrowers should always be cautious about over-stretching themselves, particularly in a market where the only way is up when it comes to interest rates. Someone with a £300,000 mortgage on a variable rate of 1.18 per cent would pay an extra £1,396 per year if interest rates were to rise by 2 per cent. If you are really concerned about budgeting, then a fixed-rate mortgage makes a lot of sense.
While the low interest rate environment cannot last forever and you should always factor in some form of stress test to ensure you are not overcommitted, any rise in rates is likely to be phased and slow so there is no need to panic. The big question is what will the new ‘normal’ look like? It will be a long time until we are back up to base rate at 5 per cent again, with a more likely level around the 1 per cent mark.
As always, it is worth seeking advice as to what to do with your mortgage. With a third of borrowers currently on their lender’s standard variable rate, that is a lot of people who will be paying more when interest rates start to rise.