Borrowers: what should they do in 2014?

Steve Opie
Steve Opie

A senior member of the Bank of England has recently suggested that borrowers would be better off switching to a fixed rate mortgage to avoid being caught out financially when base rate rises!

Recent data from the financial conduct authority shows an increase in the number of fixed rate mortgages being taken out, which seems to support this theory.

The economy appears to be recovering faster than expected, with this unexpected strengthening leading economic forecasters to reassess the situation, many predicting that interest rates could double by the end of this year!

Is this a fair and reasonable prediction? Well, it really depends on who you listen to, and which newspaper you read!

Base rate has been held at a record low of 0.5 per cent since March 2009, and the building societies association last month stated that one in four borrowers say that their biggest concern for the housing market in 2014 is the threat of rising interest rates.

A one quarter per cent rise in rates will add £375 to the yearly cost of a typical £15,0000 mortgage.

So what should borrowers do?

My crystal ball shattered many years ago, but the majority of city analysts still expect rates to remain at their record low until at least 2015.

There are few signs that wage growth is picking up, and inflation is still low, both of which means there is less pressure on the Bank of England to push up rates.

However, the cost of the money that banks and building societies buy in to lend out is rising, leading to longer term fixed rates being higher than they generally were six months ago, because longer term money is more expensive.

It makes good sense to take a fixed rate if you can, as you are then protected against the vagaries of possible base rate rises, and you can budget more easily.

For the cautious amongst us a five year fix would be ideal, but these can be at least 1% higher than the two year rates.

If you feel that base rate will stay relatively low for the foreseeable future, then the two year is for you. Clearly there is no simple answer, and it really depends on how cautious or not the individual wants to be.

Personally, I don’t believe the government can realistically put up rates before 2016, but you never know!