Economic Background & Product Selection
Your mortgage was selected according to current
economic conditions and predictions. These change over
the years.
Interest Rates & Inflation
On 10th December 2003 the Chancellor of the Exchequer
Gordon Brown wrote to the Bank of England and instructed
them to keep inflation at 2% (with a 1% margin either
way). Inflation was to be measured by the Consumer Price
Index (CPI).
Interest rates can only be altered therefore to hit this target. If inflation is increasing above the target then interest rates will rise. If inflation is falling short of this target then rates will come down.
The current CPI inflation (April) was 1.9%. This seems to be high due to some temporary factors (such as oil, electricity & gas).
The worry of course is oil prices continuing to be inflationary and the effects of a sustained terrorism campaign could increase inflation. However the Bank views that the major possible upward pressures on inflation have not materialised and that the risks to inflation are broadly in balance.
Bank of England Quarterly Inflation Report May 2005.
This provides the best guide to inflation and interest
rates and hence mortgage rates and can be found on www.bankofengland.co.uk.
They produce a central projection of interest rates
which although cannot be taken as gospel, is a strong
indication of the likely scenario, with some discretion
to unforeseen factors.
The Banks central projection, as it was in the February report, is for flatness in interest rates with a possible downturn in Q2 2006. Rates have remained constant since August.
The Bank identified several factors that could push down rates:
1.) The effects of the slow down in consumer spending due to the housing market has not been correctly factored.
2.) The effects of higher rates has reduced demand by high indebted households.
3.) There are worries about the performance of pensions and endowment policies which may restrain consumption.
4.) Savings rates are increasing.
The up side risks are:
1.) Stability in interest rates may increase consumer confidence.
2.) People may spend their savings.
The analysis of other economic forecasters tends to
agree with the Banks. Their survey of market expectations,
shows that the general opinion is that rates will remain
constant with a fall more likley than an increase.
This is reflected in the forecasts for inflation with the majority (70%) believing that the CPI inflation will be below the target of 2% in Q2 2007, which is good for interest rates.
There has certainly been poor economic news coming from retail and manufacturing and the EU. On the converse side there is a possibility that the public sector will be expanded again to take up the slack.
Stephen Nickells report “Why inflation has been so low since 1999” published in January 2005 indicates we are in line for a sustained period of low inflation and hence interest rates.
There are some demand side potential problems to counter this.
Mortgage Rates
There is a reducing amount of pressure on mortgage rates
according to the May inflation report. This would indicate
clearly that a tracker rate is better than a fixed for
economic reasons. Individual needs may alter this of
course.
However if fixed rates are priced closely to a tracker and the comparative fees are taken into account it is still valid to consider this.
The Halifax house price survey has suggested that they expect to see 0.5% fall in interest rates in 2005. We would think this is unlikely however.
On the balance of economic evidence (not individual need) it would appear that a tracker or variable rate over two years would closely fit the predicted pattern of interest rates, but this of course is only a forecast.
Term of Interest Rate Projections & Scheme Length
The Bank of England’ projections and view of economic
conditions generally covers 2 years. As such this is
an ideal time economically for a mortgage product and
mortgages should be reviewed on this basis unless there
are overriding personal reasons not to do so.
The Bank of England are trying to project over 3 years, but they have commented themselves that this is not likely to be accurate. Nonetheless this provides a greater guidance over this longer period.
Housing Market
The Bank of England believes that here is a general
flatness in the housing market. The major house price
surveys agree. It is important to consider that prices
could fall as the future is extremely uncertain.
Cost of Interest Rate Increases
Your Key Features Illustration indicates the cost of
interest rate rises in your specific case, please check
this is affordable for you.
Economic Information & Mortgage & Housing
Our information and advice is contemporary and circumstances
can change. We use information provided from the Bank
of England (inflation report and monthly committee),
other economists projections, Nationwide & Halifax
& other housing surveys and one off reports such
a David Miles (Dec ’03) the UK mortgage market.
The information on here can be verified by looking at
www.bankofengland.co.uk