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To fix or not to fix, that is the question

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by Andy Golding, Chief Executive of Saffron Building Society

The question that every borrower wants to know the answer to is whether to tie themselves into a fixed rate mortgage deal, and at least get certainty, or whether to take a gamble on a variable rate and hope it pays off.

The answer is all a matter of what happens to interest rates. In the strangest set of economic circumstances for at least 60 years, there are many opinions but very few facts to go on.

Should you fix your mortgage rate now?

Economists use the phrase “balance of probability” quite a bit, so what is the balance of probability for the direction of UK base rates?

Interest rates are used by the MPC to control inflation. The basic theory being that rising rates take capacity out of the economy and falling rates put it back in. With rates at an all time low and having been so for quite some time now, plus the impact of the significant Quantitative Easing programme, both designed to stimulate the economy out of recession, you could expect that now that the UK is back into growth again, that inflation could start to rise quite rapidly.

The latest readings show that high street sales picked up more than expected and the Bank of England’s survey of regional agents showed some relaxation in the availability of credit, some signs of rising pay and continued growth in the manufacturing sector.

The target CPI measure of inflation hit an eighteen year high of 3.7% in April, though has since dropped slightly to 3.4%, is still comfortably above the target rate of 2%. The RPI measure shows the cost of living having increased by more than 5% over the last year. The rise has been largely driven by the reversal of the VAT reduction, the weakness of sterling and higher fuel costs.

However, the Bank remains confident that the CPI measure will drop back below 2% within a year, as was outlined by the Governor in his letter to the Chancellor following the inflation release. The decision to keep monetary policy on hold has been unanimous until June’s MPC meeting, where one committee member voted to raise base rate to 0.75%. The MPC are also highlighting the need to tackle the fiscal deficit, although the Governor welcomed the plans he had seen last week. A credible deficit reduction strategy would increase the likelihood of rates remaining lower for longer.

The risks to the Bank’s view are that energy prices continue to rise as they have been doing, spurred on by speculators and Chinese consumption, (whose economy has returned to double digit growth) and VAT increases introduced in the emergency budget, coupled with strong exports and a continuing relaxing of credit. These factors together would push inflation higher still and would therefore put pressure on the Bank to raise rates.

So do you fix or not? Rates could rise quicker that the Bank are currently predicting. Probably not much, if at all in 2010, but potentially in 2011.

As a mortgage borrower, fixing now for, say, 5 years provides certainty of price. Fixed rates are unlikely to get any cheaper.

That said even best buy fixed rate mortgages are significantly more expensive than best buy tracker or variable rates. If Mervyn King is right, you will take a hit on additional cost unnecessarily. Either way it’s a gamble. But even at 50/50 odds, ask yourself whether you could afford your mortgage if rates went up 3.5%. On a £150,000 interest only loan that is an increase of £437.50 per month!

There is no right answer, which is why Saffron offer both fixed and tracker mortgages in order that borrowers can choose whichever mortgage they feel most comfortable with. The advice we give is always to consider what you could afford if your payments increased, and whether that increase would be unfortunate or unfeasible for your circumstances.

Saffron Building Society is a regional building society and has been providing savings accounts and mortgages to communities in the East of England for over 160 years. They offer a range of fixed rate mortgages and tracker mortgages. They have over 120,000 members and are the ‘most followed’ Building Society on Twitter! Visit us at or follow us @SaffronBS

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The question on everyone’s lips – is now a good time to buy?

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Following the emergency budget last week, many homeowners and landlords are picking through the new factors that have been thrown in to the to-buy-or-not-to-buy conundrum.

A few reassuring points remain:

  • The new Government have some measures in place to tackle the wider fiscal issues over time.
  • The public sector has scope to cut costs without dramatically pushing up unemployment which should keep demand healthy.
  • Prices will be stable or only grow slowly for a fair while yet, allowing incomes and house prices to get that bit more comfortable in their relationship and give people time to clear other debt.
  • We are still a nation of aspirant homeowners and property should remain a viable investment; and certainly the only one you can live in!

What about first time buyers?

Many people believe that house prices are unlikely to reduce further, so now could be a good time to take that step on to the first rung of home ownership. The biggest barrier facing first time buyers is getting an affordable mortgage and a big enough deposit.

For us, that’s where the regional building society can help. Knowledge of the local area and manually underwritten mortgages makes Saffron able to help first time buyers in our community. And that extra guidance and support from your mortgage lender makes a real difference when taking out your first mortgage.

What will happen to interest rates?

This is a question which we ask ourselves regularly. It’s a difficult one to call – and though there have been some murmurs that, considering the rise in inflation, the Bank of England ought to lift base rate off the floor, they’ve not moved yet, and when it does, it’s unlikely to be dramatic.

Saffron is prepared for base rate to remain at 0.5% throughout 2010 and we don’t anticipate it rising by more than a percent or so in 2011. It’s quite a conservative projection, but we have to play it safe and reforecast regularly as the climate changes.

Ultimately, though, this is all based on conjecture and opinion. To help you make up your own minds, here are a few facts:

  • For the first time since the Thatcher days the percentage of people owning a home in the UK has declined.
  • This recession was worse than the previous 2 – GDP fell for 6 consecutive quarters by 6% peak to trough, where as in 1980/81 and 1991/92 it fell 3.8% and 2.5% respectively.
  • Industry faired better this time around, keeping more people in work – with unemployment peaking at 5% versus 1980/81 at 10.3% and 1991/92 at 9.9%.
  • House price falls were bigger and quicker this time around with a range of 7 – 33%, against ranges of 0 – 12% in1980/81 and 0 – 15% in 1991/92.
  • Low interest rates are helping keep repossessions low being at a peak of 6% pre this recession against 15% in both the 80’s and 90’s.

This article was written for by Michelle Monck DipM ACIM, Head of Marketing at Saffron Building Society.

Saffron Building society is a regional building society that has been providing savings accounts and mortgages to communities in the East of England for over 160 years. They offer a range of fixed rate mortgages and tracker mortgages. They have over 120,000 members and are the ‘most followed’ Building Society on Twitter! Visit their website at or follow them @SaffronBS

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