Mortgage blog: Low mortgage rates set to remain until at least 2016

Posted 14 August 2013

The new Governor of the Bank of England has unveiled a radical new policy and pledged to keep interest rates low until the UK unemployment level falls. In his first major speech, Mark Carney revealed a new philosophy of ‘forward guidance' in which he committed to keep mortgage rates low until unemployment fell to 7% from its current level of 7.8%.

Around 750,000 new jobs will have to be created before the Bank of England will consider raising interest rates and this is set to see low mortgage rates remain until 2016 at the earliest.

‘Forward guidance' set to keep mortgage rates low

Experts welcomed the new governor's statement and many believe that the cost of mortgage deals may well fall after the announcement. Alan Higgins, UK chief investment officer at Coutts, said homeowners with mortgages linked to base rate "will not face imminent increases to their monthly payments". He added: "Fixed mortgage deals are already at record lows and this should give greater confidence to banks to launch more of these products."

Keith Osborne, editor of agrees. He says: "Now that the Bank of England has committed to low interest rates for the next three years, lenders will have the security of knowing how to price cheap fixed rate deals against the backdrop of settled, low interest rates."

Fixed rates remain popular with the ‘vast majority' of borrowers

With base rate cuts unlikely, most mortgage borrowers are choosing to take advantage of record low fixed-rate deals rather than tracker- or variable-rate mortgages. The cheapest deals are currently two-year fixed rates. HSBC recently became the first lender to launch a deal at below 1.5% with its 1.49% deal available to a maximum of 60% lending. The Daily Telegraph reports that "for those with smaller deposits the best two-year rates fall around the 2% mark."

However, borrowers should be wary of taking out a short term deal. Osborne adds: "Two-year fixed-rate deals could come to an end just as interest rates are starting to rise, and so if you are considering a short-term deal you should bear in mind that you may face higher repayments when your product expires."

Five-year fixed rates start at around 2.5% depending on the size of your deposit/equity. Norwich and Peterborough have a deal at 2.59% available to a maximum of 65% borrowing.

And ten year rates are higher still. The best deal is at 3.84%, also with the Norwich and Peterborough. Other lenders including the Chelsea Building Society, Barclays and Santander also offer long-term fixed rates of between six and ten years' duration.

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