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Many pundits predict that the only way is up for interest rates and that we will start to see an increase during the third quarter. Some say that borrowers should consider locking in to current low interest rates before a potential sterling crisis forces the Bank of England bank rate up to defend the pound.

I expect interest rates to remain very low by historical standards throughout the coming year. The Bank of England will be in no hurry to raise the bank rate and rates are most likely to remain at current levels for much, if not all, of 2010. I expect any interest rate rises to be modest.

Mortgage rates have continued to creep down, with lenders eating away at their fixed rates in particular. The cuts will be tempting to some borrowers who have enjoyed rock-bottom standard variable rates but are now getting edgy about the possibility of an increase.

Most SVR borrowers should be sheltered from a rate rise but some smaller building societies have recently raised SVRs despite the fact that the base rate has not increased. This move is aimed at forcing borrowers enjoying low SVRs into remortgaging.

The possibility of fixed rates coming down further looks promising. As the UK begins to creep out of recession, confidence has improved a little and the cost of borrowing fixed-rate funding on the money markets for lenders (swap rates) is falling.

Trackers remain substantially cheaper than fixed-rate deals, an average of 1.5 per cent cheaper in initial rate terms, according to mortgage brokers John Charcol.

But what looks like a bargain rate now could soon get very expensive when interest rates rise. Even the best trackers are at about 2.5 per cent above bank rate. This is fine when bank rate is 0.5 per cent and a lot more expensive if it rises to just 2.5 per cent, which would still be a low level.

Anyone considering a tracker needs to make sure they are not just storing up a problem for the future.

If the tracker comes with an early redemption penalty that would make it expensive to jump ship, then make sure their finances could take a rise of at least 2-3 per cent in interest rates.

If inflation hits hard and it is already above target, this is a plausible scenario for interest rates over a two-year period. Of course, that may not happen. Inflation may subside, the UK may remain in economic turmoil and rates may stay below 1 per cent for some time to come. If that happens, a tracker looks a good bet but just remember it is a gamble.

With the number of mortgage approvals rising, some experts feel that the recovery of the housing market will also have an effect on interest rates. But interest rates remain a guessing game and the key is to as client and ascertain how rate-sensitive your clients are.

The big stumbling block for many clients will be that if they want to take advantage of the best deals they will still need a hefty deposit, the best still ask for 40 per cent but 25 per cent deposit deals are looking increasingly attractive.

Sally Laker is managing director of Mortgage Intelligence and Mortgage Next


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