We live in strange times. A little over ten years ago, the financial systems came close to collapse, and were only saved by what were at the time record low interest rates. Since then, we have faced both Brexit and Covid, and the interest rates that seemed so low in the wake of the financial crisis now look positively punitive.
But now, with a Bank of England base rate of just 0.1%, we are starting to see suggestions that interest rates may head back up.
At Continuum we are looking at whether this is likely and what it might mean for you and your finances.
What’s the problem with a low interest rate?
The current low interest rate means that it is cheap to borrow money. Businesses can borrow to buy stock, to build factories, pay for machines and take on staff.
Low rates are clearly vital to support the post-covid recovery.
But they may already be stimulating the economy a little too much. Low rates and cheap money can mean rising prices and inflation could start to threaten the recovery the low interest rate is designed to protect.
Low rates may be behind the house price boom, Mortgage rates are low, people can afford to pay more for a home they really want. Large mortgages are easy to afford, but this house price inflation starts to pull the lowest rungs of the housing ladder out of reach of first time buyers.
Low rates also mean serious problems for those who live on income from savings. They may have started making their retirement plans when rates were closer to 10%, rather than a hundred times smaller.
Are savings letting you down?
If low interest rates means low returns on savings, you might need to consider investment. Call us at Continuum for some free initial advice.
What will change?
The interest rate is the main lever for controlling the economy, and with inflation running at close to 3% again, it looks likes the lever may have to be pulled.
But it can’t be pulled too hard.
Some on the Bank of England’s Monetary Policy Committee may be happy to increase the rate to contain inflation, but others are wary that cutting off cheap money will cut off the recovery. It is not just increased costs to business that would be the problem. A rise in mortgage rates that accompanies a rise in Bank Rate would have a bigger impact on the economy via the housing market. Many home buyers have stretched themselves to take full advantage of low rates, and with household cash flows already tight, any increase in rates might mean that thousands up and down the country could no longer afford their homes.
A rate rise might be uncomfortable for those who have stretched themselves too far on the unrealistic belief that rates would stay low forever. However, most lenders will have been cautious, and affordability margins should make a small rate rise survivable if uncomfortable.
Some lenders may be withdrawing their lowest rate offers and particularly the fixed rate offers in preparation for a Bank of England rate rise.
Worried about a rate rise?
If an increase in interest rates would upset your financial arrangements, call us at Continuum for expert help – and a personal money management plan which could help you make the most of all of your financial arrangements
So will the rate shoot up?
Nothing is certain, and the Bank of England will be wary of choking off recovery in the economy, which still looks fragile.
The Monetary Policy Committee might hike its base rate from the current record low of 0.1%. But it is low even if it shot up by a factor of five, the resulting 0.5% is still lower than the 0.75% in place before the pandemic struck at the beginning of last year.
With historic low rates, any changes may not be dramatic. But whatever size the increase is, if you act now, it might still be possible to fix your mortgage at what could be the lowest rate ever.
At Continuum we can help, finding the most suitable deal for you by searching from the entire market, and helping you fix your mortgage for as long as possible. Some lenders are offering fixed rate deals of 10 years – it could mean paying very much less for your home for many years to come.
Simply call us at Continuum for the remortgage – and mortgage – deals you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.