Four reasons not to get this mortgage

Here are four reasons why I think fixed-term variable mortgages are a waste of time...

The Base Rate is taunting us all.

Since 5 March 2009 it has been sat at the historic low of 0.5%. Commentators have been predicting an imminent rate hike for months. Yet it has not materialised. And now we see mortgage rates plunging to an all-time low with some fixed-term tracker deals creeping down to sub-2% levels.

But despite these low rates, fixed-term variables still have their downsides. Downsides that, in my opinion, make this type of mortgage a poor choice when compared to other fixed-rate and variable deals.

Rates will rise

The Bank of England Base Rate may have been sat at 0.5% for over two years, but it will rise at some point. When will this be? Well, that’s anyone’s guess. Last month I reported on a BBC poll of leading economists; a majority of whom predicted a rise in the first quarter of 2012.

However when the base rate does go, it will send shockwaves right through the mortgage market. Not least in the case of tracker mortgages, deals that are pegged to the base rate, rising and falling as it does.

Take a look at the table below outlining the current best buy fixed-term tracker mortgages. The revert-to rate is the interest rate you’ll be pushed onto after the fixed term element of the deal has expired.

Temptingly low initial rates, don’t you think? However they will not last - just as soon as the base rate rises, so will they.

Now, I know even with a hefty hike in the base rate, some of these deals still don’t look outrageously painful. Take the Skipton and Chelsea deals; if the base rate rises by 1.5 percentage points in the next two years (at the upper end of rate rise expectations), the rates on these mortgages will still only sit at 3.48% and 3.49% respectively.

Not too pricey.

However what happens when the fixed-term expires?

Well, in the short-term you’ll be pushed onto your lender’s Standard Variable Rate (SVR). Meaning that if – as I surmised earlier – the Base Rate increases by 1.5 percentage points in the next two years, you’ll be stuck with a 6.45% rate on the Skipton deal and 7.29% rate on the Chelsea mortgage (that's assuming that the lenders in question only increase their SVR by the same amount as the base rate rises, something they are not obliged to do).

Needless to say, if you do find yourself in this situation, you’ll be looking to switch products. And this is where the second problem with fixed-term variable mortgages arises...

Rubbish post-rise market

The mortgage market is currently in very good shape. At least, it is when it comes to rates. But it won’t stay like this forever. Lenders are only able to offer the current low rates to customers because of the global money markets do not expect any imminent hike in the base rate.

Now, it’s likely that over the next two years – even if the base rate is not hiked – the expectations of a rise will increase. Even the most sceptical of borrowers must surely concede that. And if this happens, mortgage rates will increase.

This means that it’s a fair bet that the mortgage market in two to three years' time will be pricier than it is now. And that’s very bad news if you’re attempting to ditch an expensive SVR tracker after coming off a two or three-year fixed-term variable.

In fact, even if you don’t fully buy this ‘prediction’, it’s still hard to refute the utter uncertainty and inflexibility of fixed-term variable mortgages. You have no idea how your rate may alter over the two or three year term, you have no (cheap) way of ditching the deal if it gets too pricey (due to early repayment charges) and you have no clue what the mortgage market will look like when you do eventually come out of the fixed term.

These uncertainties minimise any opportunities at budgeting and pose an unnecessary risk when the current mortgage market is so competitive...

Competitive tracker alternatives

Don’t get me wrong; despite my criticism of fixed-term variables, opting for a tracker mortgage is still a viable home-loan option. However in the current unstable climate, you’ll want as much flexibility as possible built into any variable deal you take out. This is why I believe plumping for a lifetime tracker that is pegged at a certain level above the base rate forever is a far more sensible option than taking a fixed-term tracker.

Take a look at these best-buy lifetime tracker deals...

As you can see, most of these lifetime tracker mortgages are around a fifth to a seventh of a percentage point pricier than their fixed-term equivalents. However these lifetime deals will allow you to switch out at any point without incurring a huge fee; an option you should be looking to take if mortgage rates start to ramp up again.

But even if you leave it too late to ditch and switch, you still won’t be left completely out of pocket if you decide to stick with the lifetime tracker. For example, if you’re on the 1.89% plus base rate ING Direct deal and the Base Rate rises by two percentage points – you’ll still only be paying out at 4.39%. Not fantastic for a 60% LTV deal, but still a far cry from the SVR disasters I looked at earlier.

What’s more, the fees applicable to these market-leading lifetime tracker mortgages are all lower than their fixed-term equivalents.

And lifetime trackers are not the only good mortgage deals around at the moment...

All-time low five-year fixes

Five-year fixes are currently at an all time low. Just take a look at these rates...

If you can stump up a 30% deposit there are several well priced, long-term fixed deals around. Chelsea’s market-leader is currently set at just 3.29%; however it does come with a hefty £1,495 fee.

By opting for a fixed deal you can be sure of your monthly mortgage outgoing, and hence budget more easily. But obviously these deals are only appropriate if you can be completely certain that you will not move within the five-year term.

If this is you, you may also want to take a look at Chelsea Building Society’s 5, 6, 7 mortgage – a deal that allows you to fix for a longer period of time at no extra cost. Head over to this article for some more information.

Do you agree?

Are fixed-term variables a waste of time?

Have your say using the comment box below.

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