Homeowners reap the rewards as base rate remains stagnant

Mortgage interest ratesMillions of homeowners across the country are continuing to enjoy the delights of paying next to nothing on their mortgage interest as the base rate remains stagnant.

As the Bank of England (BOE) has decided to keep the base rate at a record low for the 34th consecutive month, happy homeowners are paying less interest on their mortgage repayments than ever before.

This is great news for those on a variable rate mortgage, as the interest repayments will often line up with the BOE base rate. However, those on a fixed mortgage rate can do little to reduce their rates and the low rates are less favourable.

Low interest rates are also great news for potential first time buyers as they can look towards getting a variable mortgage. Many leading industry experts don’t expect a rise in interest rates until at least the middle of 2013. Others believe that it will be as late as 2015 before there will be an increase beyond 0.5%.

Inflation helping base rate

Inflation plays a big part in the ‘real’ value of your property, as does the fluctuation of house prices.

In November, inflation fell to 4.8% after reaching its peak for 2011 at 5.2% in September.

The last time it reached over 5% was in 1992! High inflation is bad news for anyone with a large chunk of cash saved or invested in property/pensions.

This is well above the BOE target rate of 2%, meaning that Brits have significantly less value in their ‘real’ wages, savings and investments than they should have.

This has a knock-on effect on the UK housing market as it means that the value of properties will continue to fall, yet they might not fall at the same rate. Homeowners are faced with the prospect of living with negative equity.

Property values falling

The Council of Mortgages lenders (CML) reported that thousands of people who purchased a property before the credit crunch are now living with a lower value home.

The CML claims that those who purchased homes at the peak of the market with 100% loan to-value (LTV) mortgages have seen their property value drop by up to 60% in some cases.

It is also worth noting that anybody looking to save for a deposit is faced with saving for longer than they may anticipate as the value of their cash drops.

Whilst wages remain frozen (by almost three years in some cases), many people who aspire to be homeowners are struggling to raise the much-needed cash for a deposit.

The BOE is to meet later next week to review the rate of inflation. If the new figure was to keep in line with the falling trend over the last few months, many can expect inflation to fall further, bringing an element of hope to the housing market that is badly needed.

Whilst you might not be able to protect your home from falling prices and negative equity, you may be able to protect the contents and building with adequate home insurance.

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