What can we expect interest rates to do in 2010? - 15 April 2010

“The average mortgage rate was 5.20% in October 2008, and is 3.60% today. This 1.6% fall is due to the global financial crisis, and more precisely to the moves made by the European Central Bank (ECB) to support the economy and encourage the recovery. In order to provide this stimulus, the bank reduced its key interest rate - the one that dictates all other interest rates - with the aim of reviving private and entrepreneurial investment”.

“We’re currently experiencing a period of flat-line stagnation, and we expect rates to remain extremely low for a while, before starting to rise slightly, which will probably be this summer. Nevertheless, rises will be gradual, because the ECB will act cautiously to ensure that any increase does not hold back growth”.

“There are 3 indicators in particular that we should keep an eye on.

• The first concerns inflationary pressures, and there's no doubt that those are present in the economy. For example, we've seen recent gas price rises and salary increases for teachers.
• Next comes the trend in unemployment. We've heard that unemployment seems to have bottomed out, and this will have its effect on future rises in interest rates.
• Lastly, there is consumer confidence, which also seems to be on the increase.

When all 3 of these factors converge, we can expect to see rates begin to rise.

But regardless of that, there's no reason to be hesitant about property purchase, which is a long-term commitment in terms of family considerations and asset investment. The right time to buy your own home is when the purchase fits in with your plans for the future. That's especially true when rates are at historically-low levels and are likely to rise only gradually. Added to which, there are a number of very attractive incentives available for home buyers, including the doubling of the interest-free mortgage (PTZ) until the end of June and an ongoing subsidy after that.
Even in the buy-to-let market, low rates and the benefits available under arrangements like the Scellier scheme make this a good time to invest”.

 

“The best solution is to combine the two! Putting together a fixed rate for security with a particularly-low variable rate is the ideal strategy.
People are sometimes afraid of variable rates, but they are currently very low and when they do begin to rise, they will rise only slowly. By opting for a 1-point capped variable rate (which cannot increase by more than one percentage point), you can currently get 2.80% over 15 years, and that rate can never rise beyond 3.80%.
Putting that together with a fixed rate of 3.60% gives you a cheaper funding package so that you can either reduce your monthly payments or pay off the capital more quickly if you plan to sell within the next few years”.
 

“The best strategy is the one that's right for the borrower! If low interest rates give someone on a limited budget the opportunity to fulfil their dream of becoming a homeowner, then he or she should use the opportunity of low rates to reduce the level of monthly payments. An older buyer may prefer to opt for a shorter repayment period. On the other hand, a young family with good financial stability may consider buying somewhere with an extra room for a future child…”

“In this case, the period of the loan should be matched to that of the tax benefit, where the main aim is to reduce tax liability. But if you are thinking of investing in a property that will later be occupied by one of your children, then the approach should be different, because you can look beyond the period of the tax benefit. Lastly, if your goal is to build a property portfolio to generate additional revenue in retirement, it is possible to borrow over a longer period”.