As speculation intensified that interest rates may rise earlier than forecast – amid concerns about worsening inflation – mortgage lenders this week rushed to withdraw their best fixed-rate deals. But for savers there is hope for better rates after years of rock-bottom returns.
The money markets are now pricing in three 0.25% Bank of England rate rises by the end of the year, leaving many homeowners and buyers wondering whether or not they should be grabbing one of the remaining fixed-rate deals to protect themselves.
It is clearly a nervous time for some, though there were mutterings from a variety of commentators that many of this week's press articles ("Soaring interest rate on the way" and "Home loan time bomb as cheap deals go" were just two of the front-page headlines) were unduly alarmist.
Not everyone buys that soaring rates story; Ray Boulger at mortgage broker John Charcol says he expects the base rate to stay at 0.5% until the second half of the year, "and then only rise slowly", while Mark Harris at fellow broker Savills Private Finance says: "I expect the Bank of England to hold its nerve and allow inflation to fall of its own accord. Raising interest rates is not going to deal with spiralling prices."
That said, things have moved on a good deal since articles appeared last summer claiming the base rate is set to stay at 0.5% for years – which left those sitting on base-rate tracker mortgages feeling smug. So, what is the best advice for people buying a home, homeowners looking to remortgage, and Britain's army of long-suffering savers?
Here we examine the options and round up some of the best deals.
Mortgages
Even before this week's news, many lenders and brokers were seeing growing demand from borrowers for fixed-rate mortgages, as speculation over inflation and the possibility of rising interest rates intensified. The latest coverage will have inevitably caused that to increase.
The bad news is that during the last week or so, many of the best fixed rates have been pulled. Leading lenders who have withdrawn, or increased, deals in recent days include First Direct, which pulled its 3.89% best-buy five-year fix on Tuesday, Halifax, Northern Rock, the Yorkshire and Skipton building societies, and Barclays Wealth, which did have a five-year fix at 3.99% for selected borrowers.
"Several lenders have already increased their fixed rates on the back of rising 'swap rates' – the rate banks pay to borrow from each other – and others are expected to follow suit in the next few days," says Melanie Bien at mortgage broker Private Finance. "Most at risk are market-leading rates, which are being snapped up by borrowers fearful of an imminent rate rise. Lenders are pulling fixes with little or no notice, so it can be difficult to plan ahead."
Those who want the security a fixed-rate deal offers are being advised to move quickly, while rates are still quite low. However, Bien says: "It's important that borrowers don't panic." A lot depends on your own circumstances. If you would struggle to pay your mortgage if rates were to rise, then a fixed rate makes sense. If you can secure a good rate now, that makes even more sense.
"You can book a rate up to six months before you actually take it out, depending on the lender, so this may enable you to enjoy a cheap variable rate for a while longer, before moving on to the fix, giving you peace of mind," says Bien. "Otherwise, there are some good trackers available, some with options to switch to a fix without penalty. The potential downside of this strategy is that fixes will be more expensive if you wait until interest rates are rising."
Five-year fixes have been proving particularly popular, though you will now struggle to find deals below 4%. However, Bien argues that if you can secure a five-year fix of less than 5%, "that's an excellent deal".
Mark Harris says the advice remains: if you need certainty, go for a fix. "If you can afford to experience any moderate interest rate movements, then select a tracker/variable product." He says well-off borrowers taking out mortgages over £1m are still plumping for the variable interest rate option in nine out of 10 cases (though, of course, they probably don't need the certainty of set monthly payments to help with budgeting).
Best-buy fixes at the time of writing include:
• NatWest's 3.95% five-year deal with a £699 fee, where the minimum deposit is a hefty 50% (it could be a good one for some remortgagers who are looking to fix).
• Bank of Ireland UK's five-year deal at 4.29% with a £799 fee. Maximum loan is 75% of the property's value.
• Yorkshire Building Society has a 3.99% five-year fix, although the maximum loan is 60% and there is a chunky £1,495 fee. For loans up to 75% the rate is 4.19%.
• For those with only a 10% deposit, the Post Office has one of the best five-year deals: 5.99% up to 90% LTV (loan-to-value), with a £995 fee.
Savings
Talk of interest rate rises will be welcomed by millions of older people and others who rely on their savings for income. But they will be alarmed by another sharp rise in the cost of living.
To beat inflation, a basic-rate taxpayer needs to find a savings account paying 4.63% gross, while a higher-rate taxpayer would need an account paying at least 6.17%, says Moneyfacts. Another way of putting it is that the average savings rate that a basic-rate taxpayer is getting – currently 0.83% – is, in effect, being eroded by 3.06% a year, it adds. That means someone who invested £10,000 in January 2008 would now have the spending power of just £9,516.
"Typically, cash Isas and longer-term fixed-rate bonds tend to offer the best rates for savers trying to beat inflation. However, with interest rates predicted to rise by the end of the year, many investors are reluctant to lock funds away for a long period of time," says Moneyfacts Louise Holmes.
At the timing of writing, Coventry Building Society's CallSave Fixed Bond (128) savings bond, fixed for five years (until 30 April 2016) at 4.75% gross, just exceeds that 4.63% figure. Savers can deposit between £1 and £250,000, and the account is operated by phone or online. You can make a withdrawal without notice subject to a penalty equal to 180 days' interest on the amount withdrawn. The next-best five-year fixed-rate bonds are from Kent Reliance (4.51%) and the AA, Saga, and Wesleyan Bank (all 4.5%).
There are regular savings accounts that pay much higher rates of interest. The rate is typically fixed for 12 months and they won't suit those looking to put away a lump sum. HSBC has a regular savings account paying 10%, though you need to be a customer with a Premier, Advance, Graduate (Advance) or Passport account.
Meanwhile, Leeds Building Society this week unveiled a postal "base rate tracker bond" which allows people to take advantage of any interest rate hikes. It guarantees to pay the Bank of England rate plus 2% for a year (ie, 2.5% at the moment).
"Customers also benefit from full instant access to the funds at any time, without notice or penalty," it says. The minimum deposit is £1,000 and it can be opened by post or online. For details go to leedsbuildingsociety.co.uk
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