You can still save thousands with a variable mortgage

With inflation high, the economy shaky and fixed rate mortgages relatively cheap, is there any reason to go for a variable deal nowadays?

Oh how time flies when inflation is having fun!

Just a fortnight ago, I wrote that we were currently sat in the calm of a mortgage storm. Inflation seemed to be subsiding, if only by a fraction, and lenders were rushing to cut their rates amid the seasonal homebuying season.

A look at the basic state of play today seems to suggest that we may be emerging from this period of tranquility. 4.5% inflation quashed the City predictions of a 4.2% rate, and to make matters worse the Bank of England is now predicting a rise to 5% by the end of the year thanks to expensive energy bills.

Unsurprisingly, these new figures have sparked a host of fresh calls for a rise in the Base Rate, currently still sat at the historic low of 0.5%.

But what does this mean for those looking to get hold of a mortgage? As well as homeowners currently sat on a low variable rate...

Could it be time to face the facts and fix? Well, not necessarily.

Choppy figures

Although the Consumer Prices Index (CPI) measure of inflation swelled to 4.5% in April, the Retail Prices Index (RPI) – the measure that includes various housing costs including mortgage interest payments – actually fell back a to 5.2%.

This fits the explanation offered by many analysts for the surprise rise in CPI; that the late Easter holiday brought about a rise in air and sea fares along with alcohol and tobacco. In other words, this rise is something of a blip and in the long term scheme of things the picture still looks fairly unchanged.

So while the outlook may not be as grim as the figures initially suggest, it is still extremely choppy and unstable; a conclusion that offers more questions than answers.

It’s also important to consider the current state of the Bank of England Monetary Policy Committee (MPC); that’s the nine people who decide whether or not to up the base rate. Looking at the latest minutes from the MPC’s early May meeting, it becomes clear that there is still little appetite for a base rate rise.

The committee voted nine to three to keep the rate at 0.5% with two members advocating a 0.25 percentage point increase, and one – the external member Andrew Sentance – opting for a 0.5 point rise. What’s more, Mr Sentance – the member most in favour of a rate rise – retired at this last meeting and has been replaced by Ben Broadbent, a strong supporter of the MPC’s current fiscal tactics.

Factor into this a recent statement from the Bank of England claiming that it has taken a conscious decision to “accept a temporary period of above-target inflation”, and it seems that a variable mortgage deal might not be such a bad idea after all.

Variable deals

So what variable deals are out there at the moment? Let’s turn first to the best two-year variable mortgages…

As you can see, at a glance these rates look very reasonable – so long as the base rate stays at 0.5% that is, which it won’t!

If we take the general market expectation that the base rate will start to rise gradually from November this year and hit 2% by the end of 2012, you can start to get a better idea of the interest rates you will actually be paying if you do opt for a two-year variable mortgage. The 90% LTV would reach a peak of 6.35% by the end of November while the 80% Santander deal would rise 5.89%. The 70% Northern Rock mortgage would peak at 4.98% in December 2012, if market predictions are to be believed, while the 65% LTV deal would reach 3.49%.

But these rising interest rates aren’t the only downside to two-year variable mortgages, as when your deal does run out in 2013 you’ll be jettisoned back into a mortgage market with far higher interest rates and standard variable rates than are around today. So while you may save some money over the two-year variable period, you’ll almost certainly pay over the odds when the fixed term ends.

If you are after a variable mortgage, you’re better off going for a lifetime tracker with no early repayment charges. This way you can take advantage of the current low rates, but if the fixed deals do start to rise, you’ll be able to switch without paying any charges.

As I reported last month, HSBC have axed all fees on their entire tracker mortgage range. What’s more, if you do opt for an HSBC tracker, the lender has guaranteed that a fee-free fixed rate deal will be available right up until 31 December 2011 – so long as your mortgage is no more than 80% of your property’s value.

HSBC’s rates are also very competitive with current tracker deals of 2.39% for 60% LTV, 2.99% if you have a 20% deposit and 4.69% if you opt for 90% LTV. Head over to my article for a full analysis of the deal.

And here are a few other lifetime tracker deals with no early repayment charges…

If you decide to take the lifetime tracker option it’s a good idea to work out how much you’re initially saving compared a fixed rate deal, and either overpay to that amount or put the excess cash aside in order to pay off a lump sum of your debt in the future.

Be under no illusions though, going for a variable deal in this climate is a gamble. Bankers, analysts and journalists can speculate all they want about when the base rate will rise, but the truth is no one knows. Interest rates could jump more sharply than expected, sooner than expected, and if you’re on a variable rate you’re in for a rough ride. After all, no one predicted the emergency cutting of interest rates by 1.5 percentage points three years ago.

And with fixed mortgage rates dipping below the 4% mark for those with a 25% deposit, the question on many people’s lips is not whether to stick with their variable or not; it’s whether to fix now, or wait for fixed rates to fall even further.

Here are ten of the best fixed deals around at the moment…

Four fantastic five-year fixes

Six superb short fixed rates

What do you think?

Is it time to ditch the variable deals and snap up a fixed rate mortgage?

Let us know your thoughts in the comment box below.

More: The best mortgages for low deposits | Avoid these rubbish mortgage deals | It’s time to ditch mortgage fees!