Borrowers are nervously awaiting the monthly interest rate decision on Thursday, to see whether rates will rise and their monthly payments will rocket, according to unbiased.co.uk.
In the current climate the mortgage market is already leaving many borrowers confused about the right approach to take and the real options open to them. So what do the experts think?
John Charcol’s Ray Boulger, commented: "The two extreme views on interest rates are for the bank rate to stay at 0.5% for many more months and then only rise slowly for at least 5 years or for the bank rate to shoot up to 8% by the end of 2012.
"Some people always prefer a fixed rate, in which case the key decision is how long to fix for. I suggest those trying to decide between a fixed or variable rate should look at fixed rates for at least five years and both trackers and discount rates.
“In either of the two interest rate scenarios outlined above a two year fix will prove poor value in most cases. In the first scenario a variable rate will be cheaper over the two years and in the second scenario one would come off the fixed rate when rates are much higher and hence either be stuck on a much higher variable rate or only be able to fix at a much higher rate.
"The differentials between a market leading tracker and a five year fixed rate at the same LTV are in the region of 2% and so for a five year fix to work out cheaper a variable rate Bank Rate would have to average more than 2.5% over the next five years.
“Other considerations will obviously also apply, such as whether one is happy to be locked into early repayment charges for five years.
“There are currently mortgage deals available such as a 5.14% offset deal. There are some slightly cheaper ten year rates but having an offset facility over such a long period is very valuable, as it effectively allows unlimited overpayments, with the facility to re-borrow those funds at will at the mortgage rate over the whole ten years, thus providing exceptional flexibility for managing cash flow very efficiently."
David Hollingworth, London & Country Mortgages, said: "With many expecting interest rates to remain low for some time to come, a tracker rate would seem the obvious choice to capitalise on the cheapest rates. However, borrowers need to consider how well they will cope with future rate hikes and the consequent increase in mortgage payments.
“Many will dislike the uncertainty and be eyeing the cheap fixed rates on offer to give medium to longer term protection. Either way, borrowers could also consider overpaying whilst rates are low in order to cut their debt more quickly and improve their position for when rates do begin to lift."
Bob Riach, Riach Independent Financial Advisers, said: "It's been some time since the Bank of England cut its bank rate to its lowest level yet. Many mortgage borrowers have seen their monthly repayments reduced substantially.
“Things will not stay this way for ever though. If the predictions of economists are borne out, people with variable rate mortgages could see a big rise in their repayments within a year or two.
“I believe rates will probably go up before the end of the year, but not by much. I believe it will rise to 1% by the end of 2010. Obviously, any borrowers on a tracker mortgage would see their interest rate rise in line with any base rate increase.
“If rates go up and incomes do not, some people are going to be under pressure. Very low borrowing rates have helped to cushion some customers from the effects of the recession. We could see arrears and repossessions getting worse.
“Borrowers should move to a new fixed rate deal if they think variable mortgage rates will rise in due course."
Mark Dampier, Hargreaves Lansdown, said: "Interest rates are unlikely to rise over the next year and when they do rise it won't be by much. A good tracker mortgage would fit the bill but with the ability to change to a fix later.
“Fixed rate mortgages should fall further given the bond rally we have seen, I think the five year fix is the area I would look at if they fell further. Interest rates will stay on hold on Thursday."
Commenting on the experts’ views, Karen Barrett, chief executive of Unbiased.co.uk, said: "As the monthly interest rate decision approaches many home owners and first-time buyers have been left worrying about the effects.
“Should the committee opt to increase interest rates, homeowners may find that pressure on their finances increases as their monthly mortgage repayments rise.
“Therefore it is important for borrowers to be prepared and understand the consequences of such decisions."
