Interest rates stay low – but it pays to be prepared


Interest rates stay low – but it pays to be prepared

It’s hard to remember a time when the UK’s base rate of interest wasn’t 0.5%, but that’s where the Bank of England has voted to keep it for another month.

Earlier this month, the Bank’s Monetary Policy Committee voted to stick at 0.5%, where the base rate has remained since March 2009. This decision might be music to your ears if you’re currently looking for a mortgage – and if you are you’re in good company. The Council of Mortgage Lenders has revealed that lending to both first-time buyers and movers was 18% higher in November 2015 than a year previously.

Reasons to be wary

Low interest rates can be good news for borrowers, as mortgage providers and other lenders set their own rates taking the Bank of England’s base rate into consideration. However, as with making any financial decision, it’s important to be wary if you are considering borrowing while rates are low.

While the repayment schedule on the mortgage or loan you’re looking at may seem attractive now, you need to be sure that you’ll be able to afford it if the base rate rises. If it does go up, your lender may well put up its own interest rates as well. And a change of just a few percent could significantly alter your repayments – you may find yourself paying an additional £100 or more each month.

Don’t panic yet

Before you abandon your plans to borrow altogether, Governor of the Bank of England Mark Carney last week said that there would be no immediate increase in interest rates, as financial growth in the UK is still too weak.

However, although the base rate has been at 0.5% for nearly seven years, and many economists don’t expect it to go up in the immediate future, there’s no guarantee that it won’t rise within the next year.  But with some careful planning, you can protect yourself from getting caught out by a rate rise – should it happen. When you’re thinking about borrowing and are calculating your potential repayments, make sure you leave room to comfortably pay a little bit more – just in case rates rise and you need to – or opt for a fixed rate product.

What if I’ve already borrowed?

If you’ve taken out a mortgage since the base rate was slashed to 0.5%, you may have been enjoying the lower repayments this has afforded you. However, the possibility of a rate increase – even if it’s not for another six months or more – could be a worrying prospect.

One option available to you is to fix your mortgage if you haven’t already done so. Tracker and standard variable rate (SVR) mortgages may be good prospects when the base rate is low, as mortgage lenders usually follow this when setting their own rates. But when the Bank of England does increase its rate, your lender is likely to do the same and your mortgage repayments could go up.

However, this isn’t the case if you’re on a fixed rate mortgage. While this type of home loan can see you paying back more each month now than you would with a tracker or SVR, this buys you a level of security, because if the base rate goes up, your repayments will remain the same.

There’s no guarantee that the base rate will increase this year, so if you’re thinking of remortgaging you should consider your options carefully. And, don’t forget the Scout and Guide motto; ‘Be Prepared’ – it could mean you avoid a nasty surprise later.