Interest rates may stay low til 2010 -What should you be doing about it?

The Bank of England reckons inflation will fall and the base rate will remain at 0.5%for the next year. What should savers and borrowers do with their money?

Below are some suggestions, however if you want something specific to yourself do contact us on the contact page for your own Money & Financial Game Plan- www.wealthbabes.com

Pay attention: here comes the science
First of all the boring stuff – the figures themselves.

The Consumer Price Index – what the Bank of England uses to measure inflation – is currently 2.9%, almost a whole 1% above its target. However, the Bank is convinced this figure will fall below 2% later this year, as the massive jumps in food and petrol prices from a year ago fall off the measurement.

In addition, the Bank dropped some extremely heavy hints that the Base Rate is likely to remain at 0.5% for at least another year. But what does this mean for you and me?

Go for a fixed rate mortgage
It goes without saying that mortgage borrowers on tracker rates have been the big winners so far. But if you’re shopping around for a new mortgage this year, you may be better off with a fixed-rate mortgage.

Figures out this week from the Council of Mortgage Lenders have shown that first-time buyers and home-movers are currently benefitting from the lowest mortgage rates since 2004.

In other words, if there was ever a time to fix, it is now.

If you want the security of a fixed rate but the flexibility of a short-term deal, then HSBC has the lowest rate at 2.89% for two years, though it carries a whopping £1,499 fee and is only available with a 40% deposit or equity stake.

For those adverse to such fees, and with a smaller deposit, I like the Royal Bank of Scotland two-year fixed rate at 3.09% up to 75% loan-to-value (LTV), which has a more reasonable booking fee of just £299.

However, for me, a longer term fixed rate is by far the safest and smartest move. The best rate on a five-year deal is available from – you guessed it – HSBC! The rate is 4.39% but it’s only available if you have a 25% deposit or equity stake, plus it carries a hefty booking fee of £999.

If you’d rather not pay such a large fee, Ulster Bank has a five-year deal fixed at 4.55%, with a paltry booking fee of £295.

Prefer a tracker?
If you are determined to gamble and go with a tracker, an important consideration will be the early repayment charges – if rates do start to rise quickly, you will want to be able to bail out as cheaply as possible.

As a result, your best bet may be to go for a two-year discounted variable deal from HSBC. The rate is guaranteed to be base rate plus 1.99%, and the early repayment charge is only 1% of the sum repaid. However, this is only available up to 60% LTV.

If you only have a 25% equity stake, you can still get a tracker at base rate plus 2.45%-2.49%, from lenders such as Alliance & Leicester, Principality Building Society and Market Harborough Building Society (though these each boast much higher early repayment charges).

Savings in a piggy bank
For savers, the choice is a little more clear cut. With the Base Rate likely to be rooted at 0.5% for some time, the prospects for your money in an easy access savings account are fairly grim.

Then again, inflation is set to fall dramatically. So, if you lock in at today’s interest rates, your return should be greater (in real terms) in the future.

In other words, if you are lucky enough to have a wad of savings burning a hole in your pocket, it may be time to look at a fixed rate savings product. So what’s out there?

The current two-year market leader is this fixed rate bond at 4.25% AER from Birmingham Midshires,* You only need £1 to invest, and interest is paid yearly.

If two years just isn’t long enough for you, Nationwide has a range of five-year bonds paying 4.13% to 4.15% AER, offering interest paid on a monthly, yearly or anniversary basis.

However, when thinking about a bond it’s always worth remembering that it is not always easy to get your money out, so only ever put in what you can do without.

For more about the top fixed rate bonds for different time periods, read Earn a top guaranteed rate on your savings.

Get an ISA
Alternatively, if you haven’t yet used up your ISA allowance, you may want to consider Leeds Building Society’s five-year fixed rate ISA. The rate is set at a juicy 4% tax-free – equivalent to a 6.66% standard savings rate for higher-rate tax-payers.

Just be warned there is a penalty of 180 days interest which is incurred if you withdraw more than 25% of your savings.

For more about ISAs, read Top 20 savings accounts and ISAs.

Keeping your savings regular
Of course, rates will probably start to rise again once the economy recovers, so you may prefer not to tie yourself to a bond at today’s low rates for more than a year. If this is the case, consider taking out a regular savings account, as these also offer fixed rates, but usually for just 12 months.

If you have young(ish) children then look no further than the Norwich & Peterborough Building Society’s Family Regular Saver, paying a whopping 6% fixed for one year. Available to customers with dependent children aged up to 16, or 18 if still in full time education, the interest is paid on an anniversary basis, and must be compounded.

If you plan to save no more than £250 a month, then Barclays’ monthly savings account will also pay a fixed rate of 6%, with interest compounded and paid on a monthly basis, though any withdrawals will see you hit with a 2.85% loss of interest.



But if you plan to put away a little bit more than that each month, then have a look at Scottish Building Society’s regular savings account. It pays a fixed rate of

4% on monthly deposits up to £1,000, with interest compounded and paid on a yearly basis, and there is no account fee.

The only downside is that you cannot make payments by direct debit – clearly the Society is not a fan of 21st century technology.

If nothing else, the Bank of England’s inflation report has offered some hope for a period of relative stability following the trauma and unpredictability of the last two years.

Whatever you choose to do, good luck!



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