What do you think will happen to interest rates over the next few years?

[nikos]

We're currently on a lifetime fixed rate with Northern Rock of just under 6%. We have 13 years left to go and want to make our final house move and increase the size of the mortgage. If we pay redemption fees on this mortgage (about £4000) then we can go onto a rate of 2.59% for 2 years with no tie in, so we could shop around for another mortgage at the end of the 2 years or negotiate with NR.
But FIL said today that interest rates are predicted to go up to 8%. But dh reckons if they go up it will be by very small increments or the economy will collapse even further.
What do people think will happen over the next few years?

I think the figure of 8% has been quoted as a 'worst case scenario' by several economists although a rise in interest rates is inevitable.

From what I have read, IR's are likely to stay low for the forseeable future in order to allow for the cuts and VAT rise. What happens in the medium to long term is less clear.

We're on a 2 yr fixed rate - would have loved to fix for longer but no good long term deals around. 2.59% sounds like a very good deal - can you overpay on this?

Because we are only borrowing 70%LTV we get a better rate. We can over pay a certain percentage but probably won't be able to in the short term as increasing size of mortgage.

mintyfresh if the banks aren't offering longterm fixes at low rates, which way do you reckon they think rates are going to go?

As for 8% being doomsday scenario, its been at 15% before, the long term average for interest rates is 6% www.bankofengland.co.uk/mfsd/iadb/Repo.asp, the question every morgagor should be asking themselves is can they make ends meet with monthly payments at 6, 7 or 8%. Cover your backsides.

Agree with nestegger Looking at the current financial situation I would say 8% entirely possible.

They have to rise.

My guess is they will be at 2.5% within the year and from there could be at double figures within 5 years.

Why would they do that though. It would just lead to loads of repossessions and noone (not even the banks) benefit from that. I remember the crash in the 80s and it was awful. High interest rates and huge negative equity and you couldn't sell your house even if you wanted to. I don't think it will go to double figures in 5 years. Think there will be slow gentle rises.

But you can see the dilemma we face. Stick at our present mortgage of 6% which seems quite high or go for a cheaper mortgage at less than 3%. We only have 13 years left remember.

How much is the difference monthly between the 6% rate and the 2.69% rate? How quckly would you see a difference considering a redemption fee of £4K? Not asking you to post it here but may be worth working out at home if you haven't already?

Interest rates are bound to go up - how high and how quickly - don't know.

Quickly (not quckly)!

Two years ago few economics pundits would have predicted that today's interest rate would be 0.5%. All anyone can reliably say is that they will almost certainly not go down from here.

In your situation I would work out how much the rates would have to go up to make you worse off and consider if you think they're likely to go that high.

Inflation has just been on the news - if infation gets too high they will def put interest rates up

13 years is a long time and interest rates can change quickly, if the base rate is 0.5% now and the best short term deals you can find are at 2.69% what would the best deals be if the base rate rose to 2.5%?

Just under 6% feels high in the here and now, in a few years you may be sitting pretty with your fix in comparison to those who risked short term gain and were left exposed when rates rose.

You could also try negotiating your life time fix downwards, especially if you have a low ltv.

i think you have what would certainly have been considered a very reasonable rate of interest ot that long ago - right now - and the security of it lasting the full term of your mortgage.

historically interest has been much higher - and don't forget its not the banks rate tht counts - the rate you can get from some mortgage companies isn't that much less than 6% at present - especially with long term fixed deals. And mortgage lnders are making it v. hard to get onto tracker or bank lending rate-linked mortgages...

in your position i would sit tight, especially as the long term of your mortgage means it will be likely to greatly less than the going rate at some point before you finish paying it.

We are cautious by nature so would always try and take the safe option. But reckon with our current mortgage we weould be better off by around £200/month by changing and even more if we increase our mortgage for the bigger house.

So if it took, say 5 years to reach 6% then we would have saved a lot of money by transferring now. We are also due to get a modest lump sum from endowments in a few years, won't come near to paying off the mortgage but might take some of the sting out of higher rates.
I suppose what noone can say is that there won't be a rate of 10%in 5 years time. But wouldn't soo many people go under if they did this. That's why I don't want to be too cautious.

The base rate would only have to be at 3.5% to have retail rates at 6% again. That could easily happen over a 6-12 month period.

But wouldn't soo many people go under if they did this.

Yes they would, reposessions would rocket and prices would tumble. They, I assume means the government, you are assuming they have control of the financial system and are not at the mercy of foriegn creditors. The same foriegn creditors that have insisted on the government spending cuts to get our deficit under control.

The government have had their hands forced before, they are not all powerful we are at the mercy of our creditors and our own banks folly.

Hi
Why don't you split the difference. I think interest rates will have to go up at some point, but at this stage I don't think anyone realistically expects them to go anywhere near 8%. The consensus from economists is that they will gradually rise starting from some time next year. However, at the moment, all bar one of the interest rate setting committee are voting to keep rates as they are at the moment DESPITE the inflation figure being a bit higher than it should. I can't see anything changing their minds in the immediate future. HSBC are offering a 5 year fix at 3.94%. I reckon this is a much better deal that a 2 year fix, as interest rates could be remain really low for a big portion of that time anyway.

moneyfacts.co.uk/compare/mortgages/fixed-5-year/

You might find this recent article interesting.

Nobody knows for sure, but I personally think that interest rates are unlikely to rise much in the next year or two at least. I'm not an expert, but I did take out a lifetime tracker in 2008 which at the time gave us a higher interest rate than the fixed rate that we were also offered. We're sticking with that deal for now too.

I agree that I can't see interest rates rising much in the next year or two at least, and personally don't see them back above 5 - 6 % for a good while. I would do the maths, and decide whether you can make more money if you invest the extra mortgage moneys elsewhere (DH has done so with every mortgage we've ever had - all interest only variable rates) We now have several hundred thousand pounds of equit through this route as if mortgage rates go up we've always found savings rates which are better (even now just having remortgaged to 2.19%)

Could you explain more Hilda as I think this is what we are thinking of doing i.e increasing the interest only part of the mortgage so that we can pay off more of the capital. Is that what you mean?

sort of. We Have interest only mortgages (always have) we use any other spare money and either overpay but more often put the money somewhere else (often in other bank account, bonds etc but also stock market, wine investing (!!!!) and a few other bits and bobs. So long as the inreste and return on the capital placed elsewhere is greater (less tax) than the interest rate paid on the mortgage you pay the mortgage off more quickly. When we can't find something with a better return we overpay the capital on the mortgage. In all honesty we tend to overpay the capital on the mortgage in chunks rather than by regulalr overpayemtns.

I don't know if it would suit everyone, but my DH spends a fair bit of time moving money about. Also its harder to do if you pay higher rate tax.

I guess my point is that with a low mortgage interest rate (variable) there are more options as you have more captial to play with. If the interest rates go up other interest rates also go up and so long as you still have the capital to play with its still possible.

I would also add that doing things this way means we always have a fair chunk of capital to use if the rates get eyewatering, and can then pay off a big chunk of the mortgage should we ever need to. It wouldn't suit everyone as in effect it is gambling, but DH and I have always been happy with this and figure we may use the money rather than let the mortgage company do so given i think we are better at finance than a number of banks have shown themselves to be.

I have to admit we have made a few losses here and there, and you do have to run with them but they are easily outweighed by the gains

Checking my mortgage statements this morning, I was on SVR of 6.99 in Jan 2008. Its not like that is ancient history. Rates are going to go up.

hildathebuilder what you are doing is leveraging and is an extremely risky practice, over the last ten years you've probably done very well out of it, but I'm guessing its given you some sleepless nights as well.

I personally would not follow what you have done over the next ten years. In fact the FSA is moving to ban interest only mortgages, your partner appears to have a plan but many of those who have taken interest only as an option have no idea how they are going to pay off the principle in the end, delay the inevitable.

only some of it is remotely risky. When we put the money in a state backed bank account which was paying 3- 4% its actually a straight mathematical calculation when our mortgage fell to 0.6%. This is the bit I never understand when other people don't do the same (when they can afford to of course). The money is still there its just we are getting the benefit of the capital.

I am actually quite risk averse, and so wouldn't do this if we weren't looking at how to repay. And this is where problems do arise in some cases. But with interest rates so low I would prefer to gamble like this and control my money, than gamble on them rising a lot so as to make a fixed rate worth it. I do however accept its a gamble, but so is fixing a mortgage at a comparatively high rate. That was really my only point.

Of course I accept that some of the other investing is higher risk, but the point about investing is to spread the risk about if you have the luxury (and I do accept it is a luxury) and time to do so.

"In fact the FSA is moving to ban interest only mortgages"

Oh I bet they are They aren't getting the benefit of your money in their bank every month.
The thing is I bought my first house for £18k in 1990, I could clear that in 12 months now, but ended up paying over £40k in interest by having a nice safe repayment mortgage. I wish I'd had a interest only, I'd have saved at least 10 by just clearing it at the end of the term.

• at least £10k