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The mortgage crystal ball

Predicting how interest rates will change over the long term is difficult at the best of times. When the political and economic outlook is as changeable as it is at present it is doubly so. However, we all need to be able to plan for our financial future beyond the extent of our two or five year fixed rate plan so having a few indicators in mind can help us with our thinking.

Different sources of information have differing views on what the outlook is likely to be of course, but by looking at a few forecasters we can end up with a reasonably consistent view of where we are likely to be over the next few years.

In its Economic and Fiscal Outlook from March 2018 the Office for Budget Responsibility said: “By the first quarter of 2023, we expect the effective mortgage rate to reach 3.0 per cent, above the 2.6 per cent forecast in November. It stood at 6.0 per cent in the final quarter of 2007, before the crisis.” However, in early 2019 the OBR forecasts house prices to slump throughout 2019 – just six months after predicting a 3% rise – before recovering to rise by about 3-4% per year into 2023. They expect this to have a limiting effect on mortgage rate rises not previously predicted.

Ian McCafferty formerly of the Bank of England’s monetary policy committee suggests that structural changes in the global economy mean UK borrowers and savers should get used to interest rates being “significantly” below the 5% average of the 10 years leading up to the financial crisis. He goes on to say that “the era of low interest rates will last for at least another 20 years”. He broadly agrees with the OBR on house prices.

With inflation falling from a peak of nearly 3% in summer 2018, and low unemployment helping wages, the economic outlook would ordinarily look optimistic. There is of course Brexit, but until the outcome is clearer most economic forecasters are concentrating on factors they can predict. With that in mind and given the fact that the City is assuming there will be two interest rate rises in the next twelve months then mortgage rates look likely to drift upwards.

When looking at a new mortgage or re-mortgaging your existing property then being able to predict what you will pay is clearly still the best option. We have talked before about the benefits of two and five year fixed terms, and having the clarity of an interest rate that will remain stable is still the best option for many people. Reviewing your mortgage, particularly when the term nears its end is advisable, as is ensuring you don’t fall back to the lenders standard variable rate. Safeguarding your payments with unemployment insurance is also worth considering. Get in touch with Spot On Mortgages to discuss how we may be able to help you.

 

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