News Column

Consumers warned to prepare for future rate rises

June 7, 2014

NAOMI CAINE; NAOMI CAINE

The Bank of England left interest rates unchanged yet again this week, but consumers should start to prepare now for a change in the weather.

Economists are forecasting a hike in the base rate by April next year, and some analysts are even forecasting an increase as early as November. Rates are then expected to settle at about 3% over the next three to five years.

The rate rise is likely to have the biggest effect on borrowers as it will probably lead to an increase in mortgage costs. In fact, the rates on some home loans are already creeping up.

Last summer, you could fix your loan for five years at below 2.5 per cent. Now, the best buy is just below three per cent.

So what should borrowers do? David Hollingworth of L&C Mortgages, a broker, says: "Most people want to fix their mortgage in order to protect against future rate rises and fixed rates are still good value, even though they have been nudging upwards."

For example, Tesco Bank offers a five-year fix at 2.99 per cent with a minimum deposit of 30 per cent. The fee is pound(s)1495. Or there's a five-year fix from Yorkshire building society, also at 2.99 per cent with a pound(s)975 fee. However, the minimum deposit is 35 per cent. If you want to fix for two years, the best deal is a Post Office home loan at 1.98 per cent with a minimum 25 per cent deposit. The fee is pound(s)995.

Some tracker loans are cheaper, but they move in line with the base rate. So, if the base rate goes up, the cost of your mortgage will also rise. But some borrowers are prepared to take a calculated risk.

For example, the best buy lifetime tracker from HSBC is pegged at 1.49 percentage points above the base rate to give a pay rate of 1.99 per cent.

The base rate would therefore have to rise by a full point before the tracker would cost as much as the five-year fix - and you might be prepared to take a gamble.

Borrowers should bear in mind that the best rates are reserved for people with big deposits. Customers also have to undergo more stringent affordability checks following a regulatory review of the mortgage market.

Mr Hollingworth says: "If you don't have much equity in your home or your finances are really stretched, you could have trouble switching your mortgage under the new rules. You might therefore have to stick with your current rate."

You might also have to stick with your existing home loan if you are tied into a special deal as you will almost certainly have to pay a penalty if you want to switch before the offer expires.

However, you can still prepare for a rise in rates by overpaying your mortgage as most lenders allow you to overpay a certain amount without penalty.

Overpayment is also a good tactic if you are currently on a low- rate tracker or standard variable rate and don't yet want to switch to a fix at a higher rate.

A little overpayment can make a big difference. For example, a borrower with a pound(s)150,000 repayment mortgage over 25 years at a rate of three per cent would pay pound(s)711.32 a month.

If the borrower were to overpay by pound(s)100 a month, they would save pound(s)11,843 in interest and cut the mortgage term by four years and two months.

Savers have suffered over the past few years as banks and building societies have cut rates on savings accounts even though there has been no move in the base rate.

The rates on many savings accounts have also barely kept pace with inflation. For example, the interest rate on Britannia building society's best-buy Select Access savings account is 1.5 per cent, less than the latest official inflation rate of 1.8 per cent.

However, you are only permitted four withdrawals a year. If you make five withdrawals, the rate plummets to 0.1 per cent. Savers who prefer a more flexible account will have to settle for interest of about 1.3 per cent.

Fixed-rates savings accounts pay more interest. You can, for instance, earn 3.52 per cent in a seven-year bond from Secure Trust, but you have to be prepared to lock your money away for the full term.

Many savers are, however, wary of locking into a fixed rate now in case they miss out on future rate rises. Anna Bowes of Savingschampion.co.uk, an independent savings advice site, has every sympathy.

"It's a very difficult time for savers. Many want to take advantage of the higher rates on fixed accounts, but they are understandably worried that they could end up with a poor deal if interest rates rise."

Ms Bowes therefore recommends that savers spread their money across a range of accounts, perhaps depositing some cash in an easy access deal, with the rest in a mix of short term and longer term bonds.

She says: "There is less of a link these days between the base rate and savings rates, so it's probably safest to diversify your savings portfolio.

"You can then take advantage now of the higher fixed rates, but still be in a position to benefit from an increase in the base rate when it comes."


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Herald, The (Scotland)


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