What forward guidance means for mortgages

LAST week, the Bank of England pledged to keep interest rates at 0.5 per cent at least until unemployment falls below 7 per cent – a threshold it expects to be met in mid-2016.

Assuming the Bank sticks to the promise, and there a host of caveats in the announcement, this is good news for those seeking or holding a mortgage. Providers will be able to keep mortgage interest rates low. But specifically which types of mortgage deal are more attractive in the wake of the pledge?

“New variable-rate deals, which track the official Bank rate, only have downsides, while fixed-rate mortgages are at historic lows,” says Nigel Bedford, senior partner at Large Mortgage Loans. Since Bank rates can only go in one direction – up – variable mortgages tracking this figure present poor value. And with the cheapest deals at around 2.13 per cent, from First Direct, lifetime trackers are more expensive than two-year fixed-rates (usually around 1.5 per cent).

But two-year deals may not suit those with longer time horizons, and they fix rates over a period when few expect there to be any changes to the Bank rate. According to Jonathan Harris of Anderson Harris, “borrowers looking beyond 2015, when it is less certain what will happen with rates, should consider a five-year fix”. Harris points out that with a 35 per cent deposit, it is possible to lock-in a rate of 2.59 per cent for five years with Norwich & Peterborough Building Society, with a £295 fee. Many banks offer similar five-year deals at less than 3 per cent, giving homeowners security beyond 2015 – the year when markets, and many economists, expect the Bank may have to consider a rates hike.

A five-year fix also allows mortgage-seekers to avoid the potential for sudden rate rises when the government’s Funding for Lending Scheme (FLS) ends in 2015. Bedford points out that the chance of Bank rate rises, coupled with the end of FLS, presents a “double whammy” for holders not on five-year fixed-rate deals.

For those lucky enough to have agreed a tracker deal pre-dating the financial crisis, however, it may be best to sit tight. Many of these mortgages track at 1 per cent or less above the Bank rate – a deal that it is very unlikely to be bettered in even today’s market.