Should I fix my mortgage or keep it at a standard variable rate?

There are two parts to the answer. The first relates to what risk you can take with your monthly outgoings and the other to the update on whether or not inflation really exists.

Speak to an independent mortgage broker for advice but the shortest answer is the first part. You should calculate what you believe interest rates might get to over the period you want to fix your mortgage for (add a pessimistic contingency view on that), then ascertain if you could afford your mortgage at that level. That of course is the scientific part.

I am of the view that inflation doesn't exist and it is solely the factors I will mention below that are driving inflation so I do not believe there will be any sustained inflation that drives interest rates upwards. However, if I was a family or business and budgeting for three years from now I would factor in base rates at 3% to be sure you can afford your payments. I don't see interest rates any higher (perhaps 0.25%) before the year end of 2011 and no more than 1% higher by 2012 year end. You will need a constant watch on this.

If you already have a mortgage and are enjoying a low standard variable rate you will be in a much better position than someone taking out a new mortgage where the differences in rates are less pronounced.

For example, I have one mortgage on a variable rate which is close to the 0.5% base rate, whereas another has one of those annoying collared rates which stopped it going below 2.49%.

A new mortgage rate today on a three year tracker is achievable at 2.59% but a three year fixed rate is available at 3.09% so for a new mortgage there is only 0.5% gap per year over the three years and this may or may not be worth the risk depending on your situation.

The best two year tracker, however, is 2.14% which is superior of course to either the three year tracker of 2.59% or the lifetime tracker of 2.99%. The only downside risk of the two year fixed rate, however, is the chance you may be coming out of it just as the interest rates are about to gather pace after an economic upturn.

But, if budgeting for top end interest rates is of no concern (you are happy to take the gamble where rates may go to and this will not affect your household or business) here are my views on interest rates.

The headlines will grab all the stories about 'Rates on the way up' which is little more than scaremongering. The only real threat of interest rates is the results that come through with wage reviews during the early part of 2011. It is normally the first four months when most reviews come through and if there is upward pressure on the wage reviews, expect pressure on interest rates. I don't think this will happen.

However, every business I know is detailing a tight market explaining that they have low numbers coming through their front door. Pubs are empty and with the potential for job losses most people are battening down the hatches and lowering debt as opposed to spending. Therefore inflation shouldn't exist. It doesn't. Its primary factors are taxation, vat and fuel/food prices which I believe are firmly at the foot of speculation in commodity prices.

Western economies are struggling and doing their best to avoid double dip economies, yet we have inflation! I don't think so.

The other big driver is China, yet China has now increased its interest rates for the third time to slow inflation and certain banks are effectively moving more defensive on China by effectively shorting it. Interestingly, China's inflation is coming from food prices and housing. There is no doubt China has been a driver of inflation but to nowhere near the impact that the current inflationary pressures would suggest and it's softening.

If you would like a list of the best mortgage rates call Peter on 0845 230 9876, e-mail or take a look at our website.


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Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'

Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.All information is based on our understanding of current tax practices, which are subject to change.

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