Mortgage interest rates will rise in 2011 and carry on rising into 2012, according to a new report from the Confederation of British Industry, which predicts that rates will go up by at least two per cent by the end of 2012. This will add almost £200 to an average monthly payment.
“Many households have been benefiting (from the low interest rates) in terms of mortgage payments, but that will start to turn over the next couple of years,” said Lai Wah Co, the CBI’s head of economic analysis. The reasoning behind the rate rise prediction is that the Bank of England wants to combat inflation, which has risen worryingly in recent months.
The organisation predicts that the Consumer Prices Index, the Government’s preferred measure of inflation, will reach 3.8 per cent within the first three months of next year and that it will still be well above the Bank’s 2 per cent target two years from now. It currently stands at 3.3 per cent.
The CBI expects interest rates to climb from their record low level of just 0.5 per cent in the second quarter next year.
It forecasts rates will rise 0.25 percentage points each quarter before the pace doubles in the middle of 2012 to 0.5 point increases, taking the bank rate to 2.75 per cent by that year’s end. A 2.25 per cent rise in mortgage rates would see the monthly repayments on a typical £150,000 mortgage increase from £909 to £1096.
Although this is just one report, the fact that the CBI has chosen to make the prediction at this time indicates that it may have some information from the Bank of England, which the Bank prefers not to release directly.
So anyone planning to take out a fixed rate mortgage deal in the expectation of higher rates should compare these potential rates, and the consequent predicted cost of their mortgage, with what they would pay on a floating rate, to work out possible gains or losses.
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