Business

Will mortgage rates fall or rise?

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AS we move towards the Brexit deadline on Friday, should we look at refixing our mortgages?

Do we bet on inflation remaining benign and interest rates dropping, or will Brexit throw sterling a sledgehammer, and mean that inflation is rocketed through the UK being a net importer?

The fundamental answer to that relates to your budgeting requirements. Can you deal with your mortgage rate being higher, or considerably higher?

The Bank of England base rate is the rate at which the central bank lends to your bank. We normally expect them to match the central bank rate but with an upward margin.

In 1989, the base rate was 14.25 per cent higher than it is today. Anything is possible, and shocks to a system are indeed ‘shocks’ (unplanned) and can catch the home-owner out significantly.

If you can afford to pay your mortgage at a reasonable ‘shock’ figure, then gambling on interest rate movement downwards is acceptable.

A reasonable shock from now is little more than 3-4 per cent in my book, and any reasonable economic movements are normally reasonably well forecasted, giving you the ability to tie yourself into a fixed term as soon as is possible.

Today you can fix your mortgage with a mortgage broker at an amazing 1.19 per cent for two years, or 1.49 per cent for five years. If you prefer the gamble of rates moving down, a two-year tracker currently charges 1.33 per cent.

This obviously points to a two-year fixed rate as a good deal.

Potentially that’s the right answer, but for sure, much will happen in the UK economy over the next two years, and when/if the dust settles, borrowers will be forced into the new ‘rate atmosphere’ at that time, and not before, potentially missing the boat.

For example, rates could be under pressure from upward inflation through the ongoing pressure of Brexit nosediving sterling, but when you come out of your current two-year rate, you find yourself having to buy a new fixed rate at a much higher amount.

Remembering the UK is a net importer and who the UK imports from, any weakness in currency against Europe, China and the US will drive inflation upwards.

It could easily be argued that with most of the talk of downward pressure on rates, borrowers might wait and test the appetite to allow rates to fall before fixing, or fixing at all, if inflation doesn’t materialise.

Recent polls also show that the UK consumer doesn’t believe in the inflation figures. They believe inflation to be much higher than what is being documented. While many politicians assist in cementing that lack of trust, consumers make their own mind up and stop spending.

Retail is living proof of that. UK retail sales has now suffered the longest contraction since records began. That is a fair old period of time i.e. back to 1957. Confidence is low and morale matches it.

Economists were polled on their forecast of retail growth for December, and at a 0.5 per cent growth expectation, a 0.6 per cent fall is a big signal. Things are not good.

In December, the GFK index that measures consumer’s perception of their finance in the previous year, rated confidence as the lowest it’s been in five years.

None of this points towards a rise in rates naturally, and much has been said about rates potentially falling to support the economy.

Personally I think that is premature, and the employment figures are providing support to inflation.

It’s possible the Bank of England may look through this period as the symptoms of elections and Brexit, and create a wait and see.

Supporting that view is that those investors, hedge managers buying futures (betting on a future price in a product/currency/commodity) in sterling are at their most bullish since April 2018.

Whilst I’ve heard people say ‘sterling is flying’, it’s still a long way off where it was the morning after the Brexit vote against the euro, and that was after a catastrophic nosedive.

Remember, the ECB currently has negative rates so sterling should have had a significant surge versus the euro.

It’s best to speak to your mortgage broker and keep in touch over the next few months.

:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a complimentary review of your mortgage rate call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net