Private Finance: Interest rate and product outlook Q3-4 2016

Interest rate outlook

In our view, interest rates are likely to remain at present levels well into 2017. The base rate will start to increase when concerns over Brexit have abated and more fundamental economic factors come into play. This is unlikely to be anytime soon and when rates do start to move it will initially be by small increases over a period of time. The significant contributory factor will be the current devaluation of Sterling which will put upward pressure on inflation. Our concern is that when inflation does bite it could be significant and that rates could rise sharply, due to the numerous and varied contributory factors to low inflation having bottomed-out and passed through the cycle. 

The current climate leads to complacency, with homeowners not feeling the need or inclination to look too far into the future; by which time of course it could be too late to take advantage of current opportunities.

Nevertheless, we are always encouraging our clients to continually review their mortgage options; especially in this prolonged low interest rate environment which has given rise to some highly competitive products. This includes the market leading 2 year fixed rate deal which is now priced for as low as 0.99%. 

Product outlook: 2 year versus 5 year fixed rate deals

Based on our expert analysis of the average 2 and 5 year fixed rate deals from the UK’s top 4 lenders, we have calculated that an average borrower could make a cost saving of around 44.45% by opting for a 2 year fixed rate deal as outlined below:

 
Private Finance 2yr vs 5 yr fixed 

*(correct as of 05.10.2016) 

2 Year fixed 5 Year fixed
Lender Rate Fee Rate Fee
Halifax 1.39% £999 2.44% £999
Nationwide 1.64% £999 2.29% £999
Santander 1.49% £995 2.29% £995
Woolwich 1.45% £999 1.99% £1,499
Total 5.97% £3,992 2.25% £4,492
Average 1.49% £998 2.25% £1,123

Mortgage £165,000
2 Year Fixed 5 Year fixed
Interest costs plus fees in two years £5,923.25 £8,556.25
Difference £2,633.00
Difference 44.45%


For clients with a lower loan to value it makes even more sense to opt for the shorter term fixed rate and to refinance at the end of the term; we have calculated that the future rate in two years would need to have risen to beyond 2.75% for the next three years to make today’s 5 year fixed rate look more favourable. 

A similar argument applies when comparing a 5 year fixed rate to a 10 year fixed rate. In the absence of an accurate crystal ball however this decision is more philosophical. Historically borrowers have shied away from fixing beyond 5 years, it being very difficult to predict what their lives will look like beyond this fixed period. 

In terms of other market trends, we have seen tracker rate margins increase although pay rates and some SVRs have reduced to reflect the recent cut in base rate from 0.5% to 0.25%. 

Summary

Simon Checkley, Managing Director of Private Finance says:

‘The interest rate climate remains benign for now, yet we must be mindful of the fact that monetary relaxation and anticipated fiscal measures might stoke up inflation. Our current message to homeowners therefore when reviewing their mortgage options is to recognise that there are potentially some once in a lifetime opportunities to take advantage of to protect themselves against enduring longer term characteristics of the British economy.

 Private Finance: Interest rate and product outlook Q3-4 2016

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© Private Finance Limited, 2017. Private Finance provides independent mortgage advice and arranges individual mortgage solutions for clients. Private Finance is a trading style of Private Finance Ltd, 21 Bedford Square, London WC1B 3HH, registered in England no. 3855776 and Private Finance Associates LLP (PFA LLP) of the same address, registered in England no. OC357301. PFA LLP is an Appointed Representative of Private Finance Ltd. Charges are based on the loan amount and the complexity of your needs and circumstances. Our maximum fee is 1% however typically our average fee has been 0.28%, i.e. £980 on a loan of £350,000. Private Finance Limited is authorised and regulated by the Financial Conduct Authority (FCA registration number 310566).

Private Finance Ltd is rated 4.94 stars by Reviews.co.uk based on 259 merchant reviews

4.94 / 5 Rating
259 Reviews
Simon Checkley has assisted me on my mortgage and loan requirements for a number of years now and he always delivers the best value, lowest interest and repayments and exceptional service. This time when there was a tough deadline and the pressure was on - he was ably assisted by Chloe Leavesley who was relentless in following up Scottish Widows and Optima legal keeping me posted at every stage and making the impossible possible. Great team - really appreciate the support with terrific service. If I was a prospective client I would be seeking these two out!
Another excellent service from Private Finance thank you Tim and Maniksha, superb, 5 stars, we will be using you again most definitely. Rob Swiney
A great service, thank you guys.
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