Property buyers and investors urged to think about future rate rises

The decision was widely predicted but the key for those buying property is what kind of loan to choose as inflation remains high. Opinion is divided over when interest rates will rise but experts say a rise is inevitable and needs to be factored into the decision making process.
 
Fixing part of your mortgage could be a solution, according to Simon Gammon, head of property consultant Knight Frank’s finance department.
 
‘I do not expect the base rate to rise until the second quarter of next year, given the ongoing concerns about the economy. Even then any increases will be gradual. It could, however, make sense to take advantage of the current opportunity to fix rates at favourable long term rates before they increase. Five year fixes are available at under 4% and so if you can afford it, you should consider fixing some or all of your mortgage at this rate,’ he said.
 
‘An increasing number of our clients are getting the best of both worlds by fixing half of their mortgages at a competitive rate, while continuing to take advantage of incredibly low variable rates,’ he added.
 
Rob Bruce, head of residential research at Jones Lang LaSalle, said that an analysis of lending and inflation rates shows that the average standard variable rate for UK lenders is 3.92%, some 342 basis points above base and 63% higher than the average margin over base throughout the past decade.
 
‘Sentiment in the market suggests the base rate will remain unchanged throughout 2010 unless wider economic conditions change significantly. The housing market is likely to continue to suffer in the short term as public sector cutbacks and job loses become more apparent across the country,’ he added.
 
Ray Boulger of independent mortgage adviser John Charcol said that there has been an increased take up of fixed rate mortgages over the last few months but most of the competition from lenders in fixed rates over the last month has focused on the two year period, resulting in much more choice in the sub 3% two year fixed rate market.
 
He believes that lenders are focusing more on being competitive in the shorter term fixed rate market, widening the gap between two and five year fixed rate pricing, despite the swap rate differential narrowing. ‘This results in more borrowers choosing a two year fix because of the widening interest rate differential. Lenders who want to be competitive then focus more on the two year market because that is where an increasing proportion of demand is,’ he explained.
 
‘Maybe lenders’ much greater reliance on the savings market is a factor here, as banks and building societies try to match their borrowing and lending terms and most savers aren’t prepared to tie their money up for five years,’ he added.