So, where are interest rates going?

tbourner

I've searched a couple of threads, but all pre-government, so now we're in a ConDemNation what are peoples opinions on interest rates and where they will go in the next few years?

My problem is we struggled to buy our house 4 years ago, and we got on a 5 year fixed rate mortgage. It's at 5.99% so we've been paying loads more than everyone else for months with the low interest rates. We've got no chance of a remortgage in our current situation. So can we expect in a years time that interest rates will have gone up through the roof just in time to ruin us completely?

beecher2

Base rates can only go up, but who knows what deals will be available for you in a year's time. All you can do is try to get rid of debt, and overpay.

tbourner

We have about £28k that I'm planning to pay off in the next 3 years, but that timescale may be reduced or increased depending on where interest rates go!

princeofpounds

Answer 1: No-one knows.* If there was a consistently reliable way to predict future interest rates you could become very rich!

Answer 2: Having said that, the market does try to predict future interest rates. This is called the forward curve of interest rates (or the yield curve, or a couple of other names). Simplistically speaking, it represents the market's best guess of the likely future path of rates.

One thing to be aware of - if the 1yr forward interest rate is (say) 2%, and the two-year rate is 4%, that doesn't mean interest rates are predicted of 2% in year one and 4% in year two. The 4% number is the *average* rate of investing throughout year one and year two, so the actual interest rate during year two itself is higher.

Fixed-rate mortgages are priced off this curve, so you can get an idea of market expectations of average variable rates over the next 5 years by looking at a 5 year fixed mortgage for example.

The comparison isn't perfect as sometimes there is more supply and demand for money on a fixed/variable basis, and over different timeframes, but it will give you a general idea.

And at the moment, it looks like interest rates will be heading up, but the question is how quickly, and that depends on when/if inflation returns to the economy properly.

* EDIT: i should qualify this - no-one knows better than the market where interest rates are going, we do know a general likely direction. It's just that when you bet on interest rates, you always have to bet against the market (no-one will give you better odds than they can get elsewhere, so to speak!).

wesmortgage

It is widely anticiptade that rates will be at 1% at end of the year and at 1.25% by this time next year. I expect rates to be around 1.75% by end of 2011 but ultimately no-one knows for sure and it does look likely that rates will stay low for several years to come.

What is also interesting is that even though rates will go up, we will see more lenders comeing to the market and this will increase competition. This will mean that lenders reduce their margins above the base/LIBOR rate and therefore rates remain the same as they are today.

5.99% is not a bad rate to be on for 5 years, your timing was just unfortuante but that's the gamble you take when you take out a rate.

Fianlly, depending who your lender is when you come off of 5.99% you will fall onto a base rate tracker or their standard variable rate and that is likley to be a lot lower than 5.99% anyway.

tbourner

wesmortgage wrote: »

Fianlly, depending who your lender is when you come off of 5.99% you will fall onto a base rate tracker or their standard variable rate and that is likley to be a lot lower than 5.99% anyway.

It was a Northern Rock together loan, which is why we can't change (as we still have about 120% LTV taking into account the unsecured loan at the same rate). I don't know what their base rate tracker deal will be for us TBH I'll have to do some research.

I was worried because there are some people (Labour lovers) who are saying the Con-Lib alliance will ruin England and interest rates will be up over 7% within 2 years!!

Thrugelmir

wesmortgage wrote: »

What is also interesting is that even though rates will go up, we will see more lenders comeing to the market and this will increase competition. This will mean that lenders reduce their margins above the base/LIBOR rate and therefore rates remain the same as they are today.

Which lenders are going to increase competition in the market place?

beecher2

tbourner wrote: »

I was worried because there are some people (Labour lovers) who are saying the Con-Lib alliance will ruin England and interest rates will be up over 7% within 2 years!!

I've seen more than a few mortgage deals for those with high LTVs at 6.99% recently - historically that isn't outrageously high. If that sort of rate would ruin you, then it is time to look seriously at your situation. Have you posted a Statement of Affairs on the DFW site for help in increasing income/decreasing expenditure? Can you take in a lodger to help you save/overpay in order to get out of negative equity?

ILW

tbourner wrote: »

It was a Northern Rock together loan, which is why we can't change (as we still have about 120% LTV taking into account the unsecured loan at the same rate). I don't know what their base rate tracker deal will be for us TBH I'll have to do some research.

I was worried because there are some people (Labour lovers) who are saying the Con-Lib alliance will ruin England and interest rates will be up over 7% within 2 years!!

7% is around the long term average, so not exactly ruining the country.

tbourner

beecher2 wrote: »

I've seen more than a few mortgage deals for those with high LTVs at 6.99% recently - historically that isn't outrageously high. If that sort of rate would ruin you, then it is time to look seriously at your situation. Have you posted a Statement of Affairs on the DFW site for help in increasing income/decreasing expenditure? Can you take in a lodger to help you save/overpay in order to get out of negative equity?

I did last year, and since Sept I've been doing a spending diary. My 5 year plan is now a 3 year plan so it's going well IMO. My situation is pretty bad but I think it can only get better as long as the wife doesn't persuade me to borrow any more!!

ILW wrote: »

7% is around the long term average, so not exactly ruining the country.

It's the thought of it going from 0 to 7 in a year or 2 that's scary, then where after that? 15% within 3 years?

beecher2

tbourner wrote: »

It's the thought of it going from 0 to 7 in a year or 2 that's scary, then where after that? 15% within 3 years?

Can't see that happening, but it is sensible to have a plan of action in order to cope with double digit rates, especially if you're on Northern Rock's SVR and can't leave.