Interest rates to rise, but not yet

UK interest could be set to rise in the next year, but borrowers are still being advised to go for tracker mortgages over fixed-rate ones.

Today the Bank of England's interest rate setting Monetary Policy Committee (MPC) today voted to keep interest rates at 4.5 per cent in July.

But while this decision was widely expected, and marks the eleventh month in a row the Bank has kept rates on hold, looking ahead experts are predicting rate rises.

Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors (Rics), commented: "Rics expects the Bank of England to follow the lead of other world central banks, and raise interest rates later this year by 0.25 per cent."

The MPC raises and lowers the underlying cost of borrowing in the UK, affecting millions of mortgage holders and savers, in an attempt to keep inflation at the government's target rate of two per cent.

However, the opinion that rates would rise was not universal.

Jonathan Said, senior economist at the centre for economic and business research, said: "All eyes will be on the release of today’s [MPC] meeting minutes, which will be released on July 19th . . . however, despite the data pushing rate expectations up, our view is that interest rates are more likely to remain on hold this year than move."

And this confusion has led to a quandary for people looking to move house or remortgage.

Currently fixed-rate mortgages are higher than trackers, to take account of the rate rise expected in the next few months, but people taking out a tracker mortgage could be caught out in the longer run if rates rise more than twice in the next two years.

Ray Boulger, of mortgage broker John Charcol, commented: "Fixed rate mortgages now look expensive unless base rate rises above five per cent.

"However, there will always be a large market for fixes due to many people wanting the security of knowing exactly what they are paying out each month.

"Trackers and discounts are a better option for those wanting the cheapest deal, but able to withstand an increase in payments should interest rates rise by one per cent or so.

"An ideal combination is a tracker or discount with a droplock facility, allowing the borrower to switch to any of their lender’s fixes at any time if and when they consider the fix offers better value."

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