Recession? Depression?

Post-Election, we now know that taxation will increase sharply and there'll be pressure to reduce Welfare payments. Cuts in the budgets of Governnment departments will reduce spending and jobs are likely to be shed in large numbers. We expect to see inflation rising steadily over the next couple of years in addition, if only because experience has shown that inflation is very much in the Government’s interests as it makes public debt look smaller.

This chart shows Bank of England Base Rate between 1975 and 2009 and the biggest surprise to most people is how high and how variable rates used to be. It suggests that - however unlikely - there's no reason why interest rates couldn't increase quite dramatically - the money markets have marked up long term interest rates during the last half of 2009, leading to increased Fixed Rate mortgages. The other factor is the threat that the UK's credit rating may be reduced; if it is, international investors will see UK Government bonds as riskier, and they'll expect higher yields to compensate. Yields on Government bonds are a key factor is determining interest rates.

Here's another chart, showing the effect of rising interest rates on the monthly repayment for a £100,000 mortgage, over 25 years, on capital-and-interest repayments. If interest rates are a worry for you, the most cautious way to go from here would be to fix your mortgage for the longest period you can. You'll save some fees or expenses associated with remortgaging and there’s no guarantee that “fee-free” deals will be available in the future.

The risk of a long-term fix is that if rates don’t rise as far as you fear, or the rise doesn't happen for a long time, you’ll pay more than you would otherwise have done.

If you're worried about future uncertainty or would like more information about mortgages and planning for safety in these turbulent times - call us and come in for a chat.

Back to Money Matters Home Page

Your home may be repossessed if you do not keep up repayments on your mortgage.