Now, although I don’t like being a harbinger of doom, I currently do not see an easy way out of the situation I am about to describe below.
Business Cycles turn, at the moment we are at the bottom for interest rates as demand for goods in the “Real Economy” is so low, as the cycle turns, interest rates will have to rise, for savers, that will be welcome news, but for borrowers? Think this through, in the last 10 years in the UK, “Tracker Mortgages” have become the norm. Currently, most people on Trackers are in a position where the repayment interest rate has dropped to between 1.0% and 1.5%, meaning that even if finances are stretched unless both partners lose their jobs then the repayments should be OK.
But, when the cycle turns, the Trackers will do just that, follow the interest rate up, meaning swinging increases in repayments, possibly in a short period. Unless people are still paying their mortgage at their original rate and driving down the amount of capital owed, rather than reducing the payment to survive, the forthcoming interest rate rises will result in incresaed mortgage payments that that will match the previous decrease. If people are finding it hard to repay now, how will they cope with the increases? Any rate rise may not happen for up to three years, but when it does, if you are on a tracker, you are in trouble unless you can extend your mortgage or match the new payments.
We have one other thing that we need to consider in all of this, the Pound Sterling. If it can maintain, or rise against, it’s current position against the other world currencies, then this change in the business cycle may be able to be postponed for a a few months, maybe a couple of years, but if the Pound slips again, look out for inflation rising, and as soon as inflation starts rising, the currency falls unless interest rates go up. As it stands, it seems unlikely that Deflation, at least in the CPI, will take hold, especially with food inflation more like 5-7%
So what is the point of this post?
If you time it right, take all the advantage you can from the low rates that exist at the moment.
If you are unsure of your timing, I would get out of a Tracker within the next 12 months and move to a rate that’s fixed for 5 years if you can
whatever happens, it’s your decision, but as sure as eggs are eggs, interest rates will rise, avoid being hit by them as much as you can