So why, within the space of a week, are City pundits predicting an interest rise, central bankers warning about the impact on borrowers and one lender withdrawing a whole product range until the markets calm down?
Part of the answer lies across the pond. Last week, US Federal Reserve chairman Ben Bernanke announced the central bank could scale back its programme of quantitative easing. As this policy tool is used to force interest rates down, his speech has sent ripples through the money markets.
On Tuesday, it reached UK shores in a material way, when Paragon withdrew its fixed-rate buy-to-let mortgage range on the basis the interest-rate swap market was overly volatile.
A jittery market is nothing new. But the speculation comes at a time of particular uncertainty in the UK. After ten years as Bank of England governor, Mervyn King is stepping down and will be replaced by former Bank of Canada governor Mark Carney on 1 July 2013.
Under King, the Bank has been firmly in the low interest rate camp. Although acknowledging a long term interest rate rise was inevitable, King told MPs only this week that raising them now would be ‘illogical’ and ‘premature’. By contrast, low interest rates bought governments around the world time to address a financial crisis which was far from over.
What his successor will do when he enters the Old Lady of Threadneedle Street next Monday is less clear. Carney was reported today as telling Brits to get ready for higher interest rate. In fact, his actual words to the ITV reporter were: “Financial institutions, whether they are banks or insurance companies or major asset managers, need to manage their business for a possibility of a slight rise or material change in the levels of interest rates.”
At a time when even a 2% rise in the Bank base rate could cause significant distress to borrowers, Carney is unlikely to want to yank up interest rates. But financial analyst Louise Cooper argues the increased economic activity could force his hand. She said: “They are going to have to raise interest rates if the economy booms. Otherwise it will boom and bust incredibly quickly with massive inflation.
“If the economy gets going they will have to put up interest rate, irrespective of the housing market.”
This remains a big if. The US economy grew at 2.4% in the first quarter of 2013 – its strongest quarter since the end of 2011. By contrast, the UK economy grew by a mere 0.3%, and only served to quell fears of a triple-dip recession. Carney should have plenty of time to apprehend a boom. Furthermore, because Canada’s housing market broadly escaped the financial chaos of 2008, he also has direct experience of identifying and managing a robust housing market in the current global climate.
The UK mortgage market is also less vulnerable to interest rate rises than it was before the crash. While older borrowers may be holding their breath, those taking out new mortgages in 2013 are taking out more fixed-rate mortgages than at any time in the last decade.
It might not be the most glamorous of mortgage products, but at least the humble fixed-rate offers borrowers some time to work out a strategy for a higher interest rate world.
