Independent Financial Advisors for IT Contractors
Published on 8th July 2009
The Bank of England has announced that interest rates will remain unchanged but is now the time to fix?
Since October last year, interest rates have fallen six times from 5% to just 0.5% in March and for the last two months, the Bank of England has chosen to freeze rates and watch how the economy reacts. For many industry experts this comes as no surprise and most are predicting that rates will continue to stay at 0.5% for many months to come.
Contractors who are lucky enough to be on a tracker rate mortgage will be rejoicing at the news that their repayments will stay low for another month. If you find yourself with extra cash in your pocket as a result of the low rates then you might consider paying off expensive debts such as credit cards or store cards, or alternatively you could pay off extra capital on your mortgage each month to lower the overall debt.
It is worth bearing in mind that interest rates will have to rise at some point and whilst it is impossible to predict when this may happen, being prepared will help you to deal with the rises when they occur. Whilst it is tempting to spend the extra cash on luxury items or having fun, your low mortgage repayments could afford you a unique opportunity to pay off excess debt or invest in a pension or ISA. Being savvy with your extra cash will make a real difference when rates begin to rise and you find yourself with less disposable income again.
If your fixed rate mortgage term is coming to an end then it might be tempting to opt to stay with your provider on the rate that you fall onto as it is likely to be lower than the fixed rate you were on before. However, shopping around for a new fixed rate deal could save you money in the medium to long term when rates begin to rise again.
The beauty of a fixed rate is that the rate will continue to reflect the low interest rates that we are currently enjoying regardless of what happens. Now may be the time to act however as lenders have hiked their longer term fixed rates in recent days in response to dearer 'swap' rates which anticipate higher borrowing costs in the future. Many pundits consider fixes to be at their lowest possible rate given that we may never see lenders slash their margins to the extent that we enjoyed before the credit crunch.
If you decide to go for a tracker rate mortgage then also be aware that lenders are enjoying a significant margin as they repair balance sheets. Be prepared that a mortgage you can afford now might rise in the future as the base rate won't stay this low forever. Whereas tracker rates were sometimes below base rate or only marginally higher than the cost of money before the credit crunch, this time around typical trackers are costed at base + 3% It is therefore important to make sure that you can afford your mortgage if rates go back beyond the previous levels of around 5% that we saw in October 2008 because you could be paying an eye watering 8%.
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