Interest rate has peaked at 5.75%, says John Charcol mortgages

10 September 2007
The current Bank of England base rate of 5.75 per cent will be the top of the cycle, predicts mortgage advisor Charcol.co.uk.

Ray Boulger of Charcol.co.uk said that last week’s decision to keep the base rate static did not come as a surprise, but that they eagerly await the release of the minutes from the committee on October 18 in order to gain a better insight in to the Bank’s train of thought on the subject.

“It is expected the MPC will have discussed the possible need to cut the Bank Rate sooner than previously expected as a policy response to the credit crunch and their thoughts on this will be particularly interesting” said Mr Boulger.

“Despite the probability that the CPI (Consumer Price Index) will creep back over 2 per cent, the lower than expected current figure (1.9 per cent) is only one of the factors determining a change in course of Bank Rate.

“Another, and even more important one, is the credit crunch. The current spread of over 1 per cent between Bank Rate and 3 month Libor (London Interbank Offered Rate), which is unprecedented in living memory except for very short periods, is clearly unsustainable for any extended period if the credit markets are to function efficiently. Increasing Bank Rate in this environment would send out all the wrong signals.”

He continues to explain that the likelihood of a 5.75 per cent peak has encouraged lenders to reduce their fixed rates, but they might increase their rates again if the Bank Rate – Libor spread prevails, and rising interest rates could be seen in tracker mortgages and discounted mortgages to reflect the increased funding costs.

Charcol.co.uk now recommends that buyers opt for tracker mortgages, as this could reflect a better deal that a fixed rate mortgage. Mr Boulger said: “Despite the recent falls in the cost of fixed rate mortgages, the more it appears that we are at the top of the interest rate cycle, the less reason there is to buy a fixed rate. Therefore trackers still offer better value for those borrowers who don’t need the certainly a fixed rate provides.”

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