If you, like many, have enjoyed a period of low payments on your variable rate mortgage but are now concerned about potential increases in interest rates, then you may well have started to consider the possibility of fixing your mortgage to avoid potentially sharp and uncontrollable increases in your monthly mortgage payments. Variable rate mortgages are great whilst interest rates are low or falling, but pose a significant financial risk in a rising rate market.
Plans are available for various time periods from as little as two years and as long as ten years. Locking in a mortgage for two or three years does not give the consumer much time to execute a financial plan before there is a need to renegotiate. Many people believe that ten years is too long because the financial climate is volatile and is likely to change. A five year deal offers a good balance that is suitable for most people.
The tricky part for most consumers is anticipating how the rates will change during the length of the mortgage. The Bank of England is responsible for setting the Base Rate, which is 0.5% and has been for two years. This is a record low, so it is only logical that those rates will rise eventually. Many financial experts are expecting rates to start increasing over the upcoming six months. Everyone agrees to that general time frame but there are various theories about how high they will get and how long they will stay there.
Interest rates are reviewed by the Bank of England on a monthly basis the Base Rate is adjusted according to the economic climate. A vote is taken among members of the Monetary Policy Committee to decide what to do with the rates. The committee can vote to increase rates, decrease rates or leave them where they are. The goal for the committee is to keep inflation rates below 2%. With the current recession and economic stagnation going on in the UK, inflation is higher than that. To avoid further economic problems, interest rates are frozen even though they should be higher.
It has been felt that an increase in interest rates over the last 3 years would have caused more harm than good to the economy as a whole, so the rate of inflation which is usually the primary driver has been secondary. However, now it is felt that we are over the worst of the recession, and with inflation closer to 4% than to 2%, it is felt that the time is coming when the Base Rate will have to rise back up to its more traditional level of between 4% and 6% helping to push back down the rate of inflation.
Borrowers with variable rates will see their payments increase sooner rather than later. It is impossible to know for sure how high those rates will go or how long they will remain high before they start to come back down again. The 5 year fixed rate mortgages being offered are reasonable alternatives for people who want greater stability during uncertain economic times.
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