In March 2009, as the bank base rate was slashed to a historic low of 0.5%, when did the (colossally paid) experts say they would rise again? The Bank of England inflation report tells us those brilliant guys in the City were, on average, anticipating rates back at 4% by mid-2012. In 2010 the consensus was for 3.75% by 2013. In 2011 it was 3.5% by 2014. I dislike the phrase “epic fail”, but this might be a case where it is justified.
The trouble is, these forecasts do actually matter. Homebuyers want to know if they should fix their mortgage to protect themselves against future rate rises. Savers want to know if they should put their cash into long-term fixed-rate deposits or hold on for a base rate rise sooner rather than later.
As a result of the economists’ lousy forecasts large numbers of homebuyers have wasted large amounts of money tying themselves into fixed deals. For example, someone remortgaging in 2011 could have chosen First Direct’s 2.38% variable rate, or opted for its cheapest five-year fix at 3.49%. On a £150,000 mortgage, if they had gone for the fix, they would be more than £4,000 worse off today than if they had opted for the variable rate.
The opposite is true for savers. In 2011 you could put £1,000 into Halifax’s variable rate cash Isa, earning 2.6% interest, or gone for its five-year fixed Isa, offering a rate of 4.35%. No prizes for guessing which was the right one to go for. Broadly speaking, the clever borrower has kept on a variable rate, and the clever saver has locked their money away on a fixed rate.
But what is the best strategy today? For what it’s worth, those “experts” are predicting the first rise in interest rates early next year – but you can probably safely ignore them. Even if rates do rise, the still-enormous levels of debt in western economies and the ongoing fragility of the banks means rates are seriously unlikely to rise far, or fast.
But prudence demands that you protect yourself. Arguably, the £4,000 extra paid by the fixed-rate borrower in my example above has been for insurance against a rate rise. Oddly, an option rarely offered by mortgage brokers but fairly widely available is a half-and-half deal. You put half your mortgage on a fixed rate, and half on a variable, though you’ll have to do it through the same lender. It’s worth considering, though my guess is that the variable rate borrower will still be the winner in five years’ time.
