Personal Finance Advice Column: Interest-ing times about mortgages

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THE Bank of England interest rate has remained at a record low for a record length of time, approximately three years.

The financial press seems to think that rate will remain low for perhaps another two or three years. There is evidence to justify this as the low interest rate is fuelling the recovery of the economy. It might not seem as if this is the case as a few years ago we were hearing about the “green shoots” of the recovery from the credit crunch. The green shoots seem to have been stifled by the threat of a double dip recession. However, the green shoots seem to be starting to grow again.

The problem is that there are many experts and many different shades of opinion. Indeed, some of those opinions are directly opposed to each other. How many experts foresaw the record reduction in the Bank of England base rate? How many are right about the time scale for it to increase? How many times do the experts get it wrong? Are they right now with their predictions of continuing low interest rates?

A further complication is that mortgage lenders are increasing their rates. If you are on a standard variable rate mortgage, you will quite likely have received notice that the rate is increasing.

Why should this be the case when the Bank of England base rate is unchanged? Actually, the reasons do not really matter, whatever reason the lender gives you the effect is the same, and you end up paying more. We have all become cynical about the big financial institutions, and in my view rightly so. It is their irresponsible lending combined with their ability to convert a supposedly low-risk mortgage into a complex high-risk investment product that was in the main responsible for the credit crunch in the first place. As a result, they have incurred huge losses and have had to be bailed out by the taxpayers. The institutions are now looking to replenish their balance sheets by increasing the costs to the borrower, so that the banks can pay back the taxpayer. The borrowers and the taxpayers are essentially the same people. At the same time, the bankers are paying themselves huge bonuses, although there is some indication that the bonuses are coming down albeit slowly.

The advice about mortgages is the same as it has always been. If your interest rate has been increased, it is generally because it is a standard variable rate mortgage. These types of mortgages can be usually changed without paying a big penalty, so shop around for a better deal. There may be some charges for swapping so check that the charges do not outweigh the benefits. Think very carefully about going for a fixed rate especially for the long term. Fixed rates tend to be higher than tracker rates, and if interest rates on trackers do remain low then you could be locked into a high rate and pay more than you need. As always, seek advice from a mortgage broker who can advise you further because everyone’s circumstances differ.

Oakwood Insurance Consultants and Financial Services. Tel: 01778 341658