Interesting interest rates and the house price gamble

14 March 2011

monopolyThe UK has just celebrated the 2nd birthday of the rock-bottom 0.5% interest rate. Cakes and balloons all round. However, with a third member of the monetary policy committee now joining the votes for a rate rise, what effect could this have on mortgage rates?

Many people are currently sitting on the standard variable fence- happy that they are getting a low rate of interest at the moment, but wondering when to jump. Currently, lenders’ standard variable rates (SVR) start at around 2% higher than the base rate and many are around 3% above, but fixed rates are edging up to their highest levels in ten months, according to financial comparison site

In contrast, average tracker mortgage rates have fallen to an all-time low, and these can be tied to the actual variation in base rate, in a way that standard variables may not. Anyone unlucky enough to have been a  Skipton Building Society customer? It recently raised its SVR from 3.5% to 4.95% after it had pledged not to have its SVR at more than 3% above the Bank of England base rate.

However, despite interest rate uncertainty, optimism appears to be growing amongst homebuyers after house prices and transaction levels increased during February, according to the latest LSL/Acadametrics research. This showed that the average price of a home in England and Wales rose by 0.3% last month, while the number of transactions increased by 2.4%. And this good news could get even better if lenders become friendlier to borrowers.

Richard Sexton, business development director of e.surv says "Currently, a large proportion of buyers are those able to muster sizeable deposits, but if the economic horizon clears and the barrier of tight lending criteria is lifted, we could see both demand and prices pick up relatively quickly."

But beware, most forecasters are still predicting a further fall in house prices this year, with CB Richard Ellis predicting a 4% drop in prices in 2011 and no increase in prices until 2013.

So should you buy, remortgage or move? Or do nothing? If the base rate does increase, it is almost guaranteed that SVRs will also increase. However, some lenders might take the opportunity to increase their own rates over and above the rate of increase, in which case you would be better off with a tracker that fixes the relationship to the base rate. But should interest rates go sky high you could end up neck deep in the brown sticky stuff.

If you are on a fixed or tight budget you may prefer to know the maximum amount you will have to pay, so fixing may seem attractive, but economists like Roger Bootle, economic advisor to accountants Deloitte are predicting a slow increase in rates, if at all, meaning the fixed rate could still be far in excess of the SVR or tracker rate even in 3 or 5 years time.

It's your call...

TOPICS:   Mortgages   Real Estate


  • Delenn
    You folks need to read the Guardian. An article there shows that actual prices dropped 0.3% in February. This phantom rise was actually an unjustifiable "seasonal adjustment" that is 5 times higher than it has ever been. These people will do anything to maintain the illusion that house prices are rising and about to rise further.
  • Alex
    You chaps do realise all this research commissioned by mortgage comparison sites is done purely to panic people into using mortgage comparison sites to change mortgage? I was at a talk by the chief economist of Bank of Australia a couple of months back, he echoed other opinions I've heard that rates may get as high as 2% by the end of 2012. He wasn't trying to sell us a service either.
  • MrRobin
    @Delenn: "You folks need to read the Guardian" WASH YOUR MOUTH OUT YOU FILTH!
  • MrRobin
    Yes it's 6 to 3 on the MPC voting at the moment (Feb's vote) and we only need 2 more people to change their minds now for a rate rise (will be interesting to see if March changed any)... BUT.. one of the rate rise voters is leaving in a few month's time and will be replaced so it may go back down again.

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