-The cap is back – so think twice before locking into expensive fixed rates
Ray Boulger of Charcol, the leading independent mortgage and financial adviser, comments on the MPC’s decision to freeze Base Rate at 4.5%:
“To the extent that the Monetary Policy Committee is targeting a slowdown in house price inflation, their medicine appears to be working. It’s still very early to call but the four Base Rate increases since November last year, in particular the May and June increases, now appear to be one important factor taking the edge of what has been an over-exuberant rate of house price growth. My hunch is that when we look back on 2004 we will see that the current 20% or so year on year increases in the Halifax and Nationwide indices will have marked the peak rate of increase. We still believe however that this is largely good rather than bad news for the housing market and wider economy - and we still expect a soft landing for the market.
“It is also well worth noting that the Government’s own figures, as produced by the ODPM, are showing a much smaller annual rate of house price inflation, at around 10%. This index is reputed to reflect the actual change in the value of our housing stock much more accurately than the lenders’ figures and makes the rate of increase in house prices look much less challenging for the Bank.
“Other economic statistics, both in the UK and the USA, have been mixed over the last month and so we believe there is a strong argument for deferring any further increases in Base Rate until the effect of the 1% increase we have already seen can be more fully assessed.
What should borrowers do now?
Boulger continues, “Over the last month the money markets have slightly reduced their expectations of where interest rates will peak next year but most fixed rates have increased during the same period. Therefore borrowers shouldn’t be panicked into taking out a fixed rate now.
“For borrowers who prefer, or need, the security of a fixed rate, capped trackers look much better value than a fixed rate, although there are only a few of these products on the market. Whilst the payrates on these deals are around 0.5% higher than for standard trackers, they are initially cheaper than fixed rates for a comparable period and borrowers are protected from interest rates rising further than expected. Furthermore, instead of being locked into an expensive fixed rate they should benefit once interest rates start to fall again.”
