Rate decision Thursday

With rates rising yet again, the sensible response may seem to be to lock into a fixed rate for as long as you can, but it's probably not the right one. At the moment fixed rates are carrying a far larger premium over variable rates than we have seen for quite a while. For example, why is fixing at 3.59% a good idea if you can have a discounted variable rate at 1.85%? That's a 1.74% premium to have the security of a fixed rate. You need quite a few rate rises before the variable rate even matches the fixed rate, let alone surpasses it. And be especially careful if you are thinking of jumping out of a currently really low fixed rate and paying a penalty to do so, to lock into a new rate now. What if the current upwards interest rate cycle is not sustained and fixed rates begin to fall back in 2023? You'll have lost out on the remainder of your really low-rate deal, paid a penalty to your old lender and now be locked into a more expensive rate. So, think carefully, don't make a hasty decision and make sure you get good quality, professional mortgage advice.

UK interest rates are going up but the Government bond markets see interest rates peaking at around 3% maximum. Long-term bond yields have fallen significantly over the past month with the 10-year falling to 1.9% from a high of 2.6%. This means the markets predict that inflation will fall, that there will likely be a recession and that eventually interest rates are likely to be cut again. For investors saving into their pensions for the long term, there is no need to make any changes. Clearly every portfolio's composition depends on the risk profile, tolerance and liquidity needs of the investor but over the long term only a significant allocation to equities will lead to returns above inflation, if history is our guide. Stockmarkets have recovered off their lows as have bonds, showing how wrong it would have been to have made big allocation changes to portfolios on the back of one quarter's performance. The short term as always remains unpredictable so we always recommend to stick with the long term plan.

The most important thing in the current climate is to ensure people truly understand their own finances before purchasing a property and taking on a mortgage debt. Just because a mortgage lender can lend you X doesn't mean you should borrow the maximum amount possible. Every single person has different spending habits, and understanding what is actually affordable to you is vital. With both the cost of living and interest rates soaring, completing an in-depth review of your own finances to understand what truly is an affordable monthly payment is vital, whilst also budgeting for higher interest rates and monthly payments in the future. Whilst longer term fixed rates are very attractive and similarly priced to two year deals for the first time in decades, early repayment charges on the longer term seven and ten year deals are astronomically high, meaning that it has never been more important to plan ahead and understand your future plans before committing to a mortgage product.

Mortgage Lenders in recent weeks have been increasing their mortgage interest rates in anticipation of the announcement of the Bank Base Rate imminent increase. With inflation continuing to rise, lenders will continue to factor in potential future rate announcements in the next few months. Existing mortgage borrowers with six months or less remaining on their initial term should start the discussion with their mortgage advisers today. Ready to lock in today's rates before future interest rates movements. A 2-year fix is short-term and may land borrowers back into a market with high-interest rates. A 5-year fix gives borrowers certainty of payments for a longer term with fingers crossed inflation has been handled with interest rates decreasing again as a result." "Variable Rates are much lower than a fixed rate mortgage and may garner attention but come with the risk of increaseing giving borrowers no certainty of what the monthly mortgage payment will be." "A long-term fixed rate mortgage can look attractive in today's market but borrowers who may potentially need to sell their home within that timeframe should be weary of exit fees."

How high the Bank of England increase the base rate to this year depends on events across the pond. The Fed has already raised rates by 0.75% twice in quick succession. With commodities including oil and gas priced in US dollars, a weakening pound against the greenback is highly inflationary for UK imports. This is the dilemma the Bank of England faces. Raise rates too much, and the UK faces a prolonged and deep recession. Not enough, and inflation tightens its noose around the economy. For mortgage borrowers, locking in now to a fixed rate for several years at least removes uncertainty. Rates could go a lot higher, potentially to 4% or more in the next 12 months.

Lenders are often quick to react to a Bank of England rate rise and all too often the savers get left behind and see little benefit in the rate increase. We are seeing more and more mortgage borrowers looking at longer term fixed rates to have that much needed stability. With the cost of living crisis, huge energy price increases, many face a testing time and few believe that the situation will get better in the short to medium term. It is clear that whoever becomes the next Prime Minster will need to do more to help people get through the upcoming winter.

We are heading into unknown territory with the base rate and inflation. Although there is some benefit to savers, they would need to be pretty much mortgage/debt free or it will be cancelled out with rate rises. Also, the gap between inflation and savings rates is much higher now despite the increase in savings rates, reducing real world purchasing power. There are very few winners in the current inflationary and base rate increase spiral. My person view is we are heading for recession early 2023.

For potential and existing mortgage holders, there will be no one-size-fits-all solution as to what they should do with their mortgage and everyone should sit down with an expert to talk about their finances and plans for the future to put the right product for their needs in place. Some clients will need that longer term security and can't afford to take the risk if they keep rising, others will have the disposable income available to take the chance that rates may come back down at some point in the future and may look at fixing for a shorter duration.

The biggest losers with rates going up are low earning people, who are already in 'energy poverty' and this will only sink them further into despair. For savers, banks are generally extremely slow to pass on the full increase in rates but even what is passed on will be largely irrelevant considering the massive gulf with inflation. Pay off your debts first and consider long term investments to combat the rise in living costs. Mortgage borrowers should be shopping around six months prior to their product expiry date so a decent broker can secure them a rate before further rises come into play. It's still massively important you get advice and search the whole market for the the right deal to fit your circumstances. There is no loyalty for staying with your bank for lending or saving. Face the ongoing crisis and plan for increased costs by budgets and cutting back on those unnecessary Direct Debits.

They won't be popping the champagne corks quite yet, but this latest rate rise is good news for savers. Those who are holding money in bank accounts are taking a pounding from inflation being so high and this latest increase will ever so slightly ease the pain. Those with longer term investments such as pensions and ISAs should continue to stick to their plan.

If you have a mortgage that is due for renewal, I would fix it as soon as possible and seriously consider a longer fixed rate if you plan on staying in the property for the long term.