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  • 27/09/2002
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Current predictions say the Bank of England base rate will remain stable, or drop another quarter of...

Current predictions say the Bank of England base rate will remain stable, or drop another quarter of a percent which is the time when borrowers will probably take out tracker or discount mortgages in droves. But, under current economic conditions, now is the perfect time for advisers to be recommending fixed rate mortgages.

Fixed interest rates have reached new record lows this month, as the five-year swap rate is now just 4.7%. Such low rates have been driven by the weakness of the stock market, causing fund managers to depress fixed interest rate yields.

This low cost of funds is good for brokers and consumers alike, and has been reflected in the housing market with another lender reducing the price of its fixed rate mortgages almost every day.

While, at the same time, the housing market is at last showing signs of slowing down, which has got to spell good news for first-time buyers.

Some housing market forecasts, which predict the annual rate of house price inflation, are suggesting it will ease back from 18.8% (predicted by Halifax) to around 15% by end of the calendar year.

While the UK domestic economy is still in relatively good shape, with unemployment at a 25-year low of 3.1%, other countries are not faring so well.

Unemployment in the US is 5.7%, which is consistent with negligible economic growth. In the Far East, Japanese economic growth is currently close to zero. And on the Continent, German unemployment rose last month and is fractionally under the psychologically-important 10% level.

So what has this got to do with mortgages? Well, the UK depends on international trade, in both industrial goods and invisible exports. As US interest rates fall, so do sterling, the euro and longer-term interest rates ‘ which has a direct effect on mortgage rates. The UK is becoming more closely related to the euro rather than the dollar and fixed interest rate movements rather than the UK/US fixed interest differential.

The UK economy is growing at about 1% a year. One feature of the UK’s economic dark decade is threatening to re-emerge ‘ the spectre of public sector strikes in support of high wage demands. Against such a threat, the Bank of England will be reluctant to reduce base rates, even if the US reduces its base rate.

The outlook for the hous- ing market remains positive throughout next year. The market is likely to settle down to a more sustainable level of growth. Mortgage rates will remain low over the next year even if Bank of England base rates rise in line with some forecasts to 5% by the end of 2003.

Laurence Sanders is an economist at Bristol & West


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