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Interest rate outlook
In our view, interest rates are likely to remain at present levels well into 2017. The base rate will start to increase when concerns over Brexit have abated and more fundamental economic factors come into play. This is unlikely to be anytime soon and when rates do start to move it will initially be by small increases over a period of time. The significant contributory factor will be the current devaluation of Sterling which will put upward pressure on inflation. Our concern is that when inflation does bite it could be significant and that rates could rise sharply, due to the numerous and varied contributory factors to low inflation having bottomed-out and passed through the cycle.
The current climate leads to complacency, with homeowners not feeling the need or inclination to look too far into the future; by which time of course it could be too late to take advantage of current opportunities.
Nevertheless, we are always encouraging our clients to continually review their mortgage options; especially in this prolonged low interest rate environment which has given rise to some highly competitive products. This includes the market leading 2 year fixed rate deal which is now priced for as low as 0.99%.
Product outlook: 2 year versus 5 year fixed rate deals
Based on our expert analysis of the average 2 and 5 year fixed rate deals from the UK’s top 4 lenders, we have calculated that an average borrower could make a cost saving of around 44.45% by opting for a 2 year fixed rate deal as outlined below:
Private Finance 2yr vs 5 yr fixed
*(correct as of 05.10.2016)
| 2 Year fixed | 5 Year fixed | |||
| Lender | Rate | Fee | Rate | Fee |
| Halifax | 1.39% | £999 | 2.44% | £999 |
| Nationwide | 1.64% | £999 | 2.29% | £999 |
| Santander | 1.49% | £995 | 2.29% | £995 |
| Woolwich | 1.45% | £999 | 1.99% | £1,499 |
| Total | 5.97% | £3,992 | 2.25% | £4,492 |
| Average | 1.49% | £998 | 2.25% | £1,123 |
| Mortgage | £165,000 | |||
| 2 Year Fixed | 5 Year fixed | |||
| Interest costs plus fees in two years | £5,923.25 | £8,556.25 | ||
| Difference | £2,633.00 | |||
| Difference | 44.45% |
For clients with a lower loan to value it makes even more sense to opt for the shorter term fixed rate and to refinance at the end of the term; we have calculated that the future rate in two years would need to have risen to beyond 2.75% for the next three years to make today’s 5 year fixed rate look more favourable.
A similar argument applies when comparing a 5 year fixed rate to a 10 year fixed rate. In the absence of an accurate crystal ball however this decision is more philosophical. Historically borrowers have shied away from fixing beyond 5 years, it being very difficult to predict what their lives will look like beyond this fixed period.
In terms of other market trends, we have seen tracker rate margins increase although pay rates and some SVRs have reduced to reflect the recent cut in base rate from 0.5% to 0.25%.
Summary
Simon Checkley, Managing Director of Private Finance says:
‘The interest rate climate remains benign for now, yet we must be mindful of the fact that monetary relaxation and anticipated fiscal measures might stoke up inflation. Our current message to homeowners therefore when reviewing their mortgage options is to recognise that there are potentially some once-in-a-lifetime opportunities to take advantage of to protect themselves against enduring longer-term characteristics of the British economy.
