Interest Rate Update to 6 October 2010

UK Interest Rate: 0.5%

UK Interest Rates Forecast: Rates will remain low until mid-2011

Should You Fix Your Mortgage Rate?

As this article is being written, the Bank of England's Monetary Policy Committee is meeting to make its monthly decision on interest rates. The decision will almost certainly be the same as it has been every time for the last 18 months – the Bank Rate will be left unchanged at 0.5%.

Expectations are widespread that the base rate, as it is known, will stay at 0.5% until the middle of 2011. Yet we all know that eventually, it will have to rise. The question is when this will happen.

For homeowners, this unusual situation brings a difficult dilemma. Should you stay on a tracker or variable rate mortgage and enjoy the benefits of lower monthly mortgage payments, or should you take out a fixed rate deal now and protect yourself from future rises in your monthly payments?

There is no one right answer and it is very difficult to work out what the best approach is. Lenders' fixed rates remain considerably higher than both tracker and variable rates; according to the latest figures from RICS, the average rate on a five-year fixed rate deal with a 25% deposit is only slightly lower than it was in 2007 and is about 1% higher than a typical variable rate.

Of course, there is no such thing as a free lunch. The risk that borrowers take by remaining on variable rate mortgage deals is that their payments will eventually rise by more than they can afford to pay – leaving them in a nightmare situation.

The problem is that this may not happen for several years, making it very hard to accurately assess how risky a variable rate is for each household.