I was thinking of fixing my mortgage or just going for a flexible variable mortgage and wondered what your views were?
The advantage of a fixed rate is that you know what you will pay all through the fixed term of your mortgage. Unlike a variable rate, where you won’t know one month from the next what you are paying, the ability to control and budget is one of the driving reasons behind choosing a fixed term. Its difficulty is that you may find variable rates dropping, and you would be stuck on a higher rate. At the end of the fixed term of course there is also the potential shock of coming out of a fixed rate and into a variable rate which has shot up, meaning a massive hike in payments.
A variable rate mortgage tends to suit the person who is searching for the lowest terms and is happy to take the risk of the rate rising in the meantime.
So what is likely to influence interest rates? In simple terms the decision falls down to Mervyn King at the Bank of England. The key drivers will be the control of inflation and the general well being of the economy.
Mr King has made it clear he will not reduce rates to stimulate the economy at the expense of the threat of inflation. We therefore have a rock and hard stone.
The economy, and in particular the retail sector, took a battering over Christmas. In short, people have less money than they used to, and that lack of disposable income has made its way through to confidence. Once confidence alters sentiment, everything can become self fulfilling i.e. we talk ourselves into recession. Mr King will be under pressure to lower rates which effectively gives people more money to spend and off we go again. Simple!
The housing market also looks firmly under control with completions down over 10% on the same month in the previous year and new properties struggling to sell.1
With everything under control or indeed threatening to go too far the other way, a rate drop should be imminent. That is until you bring in the hard stone – inflation. Inflationary threats are considerable. An economy out of control with driving inflation is not pretty. It only leads to the less than exciting outcomes of higher pay demands which of course cripple commerce and the spiral is only one way.
Threats have come by way of oil and food, and there are bigger threats to come. Until now, we relied on the economic and currency gaps between here and China (for example) to dampen inflation. As a driving economy, China now has its own inflationary pressures and the goods we purchased so cheaply before are no longer going to be so cheap.
Oil has maintained its pressure but the news that the new President of OPEC is happy to increase supply if he thinks it’s needed is welcomed as this will inevitably lead to falling prices.
The other threat is food prices. China for example is reporting 17.9% food inflation and the German media have also made their points about 40% butter inflation.2 The next worrying aspect is that food is still priced relatively low in comparison to other fuels and is now being harvested to provide energy, further enhancing the inflationary risk via a food supply shortage. Years of price subsidy under the common agricultural policy has served to make farming for export, a less than attractive option for EU farmers, and this, along with the dire position in the US will mean supply will remain under threat, keeping this inflationary pressure a real hard stone for the potential for lower rates. That said, I expect the February monetary policy meeting to bring good news for borrowers.
For advice on a mortgage or if you have a general query call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our mortgage section
Source
(1) Land Registry
(2) Communiqué
The value of shares and investments can go down as well as up
Follow us on Twitter
Become a fan on Facebook
Subscribe to the RSS Feed