Avoid getting into a fix over home loans: With many economists expecting interest rates to fall, Vivien Goldsmith urges caution in deciding the best way to finance a mortgage

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The Independent Online
INTEREST rates are on the way down, even though there may be a small upward blip before they start to tumble.

So savers and mortgage borrowers should take note of the views of the economists' predictions before they decide to take out fixed- rate deals.

Roger Bootle, senior economist at Midland Montagu, expects interest rates to move sharply lower.

'I would want to fix savings rates, not mortgage rates. Our economy is shot to pieces. Either the ERM will allow interest rates to fall, or we will have to leave it. But in the short term it is possible that rates may rise, so it would be rational to take a one-year fixed mortgage rate.'

But Mr Bootle adds that home owners should steer clear of any longer fixed rates.

Bill Mott, a director of research at Credit Suisse Asset Management, says it would be foolish to fix borrowings, but fixing savings at current rates would be sensible.

'My one proviso is: can you believe what the politicians are saying? I think that they have put so much political capital into holding the exchange rates that, on balance, they will stick with it.'

He believes that inflation could fall as low as 2 per cent, with nominal interest rates at 7 per cent, still giving investors high real interest rates.

The best way to play the risk on savings is to go with inflation- linked products, says Mr Mott. National Savings' Index Linked Savings Certificates, which have a five-year life, pay 4 per cent over inflation. 'That is a satisfactory investment, whatever happens.'

Economists now have to assess the UK economy in the light of what is happening in Europe, and Germany in particular.

Adam Cole, economist at James Capel, the stockbrokers, said: 'On short-term interest rates it's touch and go whether they are going to have rise before the end of the year. It all depends on Germany. The chances are that they will raise rates. If other countries like France and Denmark manage to sit it out and not follow, then the UK will be able to avoid a rise.'

Mr Cole says he believes the UK will probably 'get away with it' and rates will start to come down in the spring of next year. They should fall gradually from the current base rate level of 10 per cent to 8 per cent over the next two years.

Simon Ward, senior UK economist at Gerrard & National, expects inflation to drop and base rates to be as low as 6 or 7 per cent in two years. 'We are assuming that there will be some sort of crisis that leads to devaluation, or the UK leaving the ERM.'

He also says that a real return of 4 per cent would look attractive in five years.

Peter Spencer, an economist with Kleinwort Benson, says there will be general disappointment about the downward movement in interest rates on pretty well any timescale.

'The normal 'all-clear siren' on inflation will not lead to sharp interest cuts because the Bundesbank is so worried about the borrowing costs associated with the reunification of Germany. So we can only expect a small cut in interest rates.'

Unlike the other economists, he would advise homeowners to go for a fixed-rate mortgage.

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