Get the best mortgage for the best reasons

What's going to happen to interest rates? Should you go for a short-term tracker or a long-term fix? Whatever your circumstances, here's how to select the right mortgage for the right reasons.

In my last article on mortgages, I gave you two reasons to go for ten-year deals. In that piece, the fixed deals I was writing about were appropriate for certain people: those who couldn't afford it if rates were to leap and those who want to be guaranteed to pay a good rate of interest by historical standards for the next decade.

Forecasting is not a reason to go long or fix

One reason I did not and never will give was because of forecasts. Most people select their mortgages – whether to fix or track, or whether to get a long or short deal – based on what they think is going to happen over the next few years. They believe they can predict which will be the cheapest at the end. I think that trying to guess this is not a good reason and would not select my own mortgage on that basis.

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My main reason for this is that both professional and amateur forecasters alike have an appalling record. This should not be surprising. Studies have shown that we're overconfident in the completeness of our knowledge and in our ability to see patterns, whilst also find it easy to disregard from our calculations the large possibility of one of the huge, unforeseeable economic events that regularly occur. What's more, we have this weakness where we block out or ignore any information that contradicts our own views and wishes. In short, humans are not designed to be economic forecasters.

Even today, with rates very low and people saying that they can only move significantly in one direction, that doesn't mean we should forecast that a fix will be better. We don't know how long rates will remain low and, if they rise, we don't know if they'll plummet again shortly afterwards.

An associated reason not to rely on forecasts is our inability to use them to our advantage, even if we could consistently get them right. Take the current setting. Some people now want to wait for signs that rates are rising before leaping onto fixed deals. However, by the time you see rates rising, competition for the cheapest fixes will be so hot that most people won't manage to get them. I have explained this more fully in the third to sixth paragraphs of my last article, so take a look.

Non-forecasting reasons to go short term

If we can't use forecasts to choose our mortgages, what can we use? In my opening paragraph, above, I explained the two reasons that some people should consider ten-year fixed rate deals and you can get a more elaborate explanation on that here.

For others with different personal circumstances, there is a good argument for short-term mortgage deals.

I'm thinking mainly of people who can afford to overpay and could still afford to pay if rates shot up.

To get straight to the point, my argument for staying more flexible is based on the fact that the difference between the Bank of England's base rate and the cheapest mortgage deals is currently unusually wide. According to my own research, in the past the best deals have normally been very close to the base rate (either slightly above or slightly below). However, right now the base rate is 0.5%, but the best mortgage rates are close to 2%, almost 1.5 percentage points higher. This means that today's deals may sound cheap, but they're comparatively expensive!

The reasons for this are that there is currently less money to lend and therefore less competition, and the fact that the base rate is so low that the mortgage companies couldn't run their businesses by coming down that far. They have fixed costs (such as salaries and rent) and need steady income from interest repayments to meet them.

What this means is that if you tie yourself into a long tracker deal now you will be tying yourself into a deal that will permanently be way above the base rate, and therefore it will not be a good deal when the base rate and cheapest deals once again fall into alignment.

But you don't have to track if you go short term

If you go for a short-term deal on that basis, whether you go for a tracker or a fix is less important, because you're not basing your decision on forecasting where rates will move in the next year or three. All you're doing is waiting for competition to return and prices to improve, i.e. to get closer to the base rate again. Therefore you want to look at all the short-term tracker and fixed deals that are available to you and look to take the cheapest with the best terms and conditions.

How to select your mortgage

There is no one size fits all. Our personal circumstances and attitudes must influence which mortgage we choose. We must consider such things as:

• What we currently pay on our SVR (as sticking with that is a reasonable alternative to getting a short-term deal)
• Whether we can get a long-term tracker with no or short early-redemption penalties (as a couple such mortgages currently exist for 'good' borrowers)
• Whether we can afford to overpay
• Whether we could afford it if rates went up
• How safe our incomes are
• The likelihood that we'll move any time soon
• Whether our mortgages are big or small

Recent question on this topic

• Username asks:

  Nationwide fixed deal coming to an end... What Next?

  • 
    rowlystravel answered "at that LTV as long as you have a good to excellent credit rating you can have whatever mortgage..."
  • 
    Username answered "Thanks.. The BMR is a variable rate with Base +2% Cap. It basically is a tracker..."
  • Read more answers

Combining all the reasons for selecting a mortgage mentioned in this mortgage article with those in my last one, we have three:

1. Personal circumstances must always be taken into consideration.

2. Long-term historic average mortgage rates could be considered, particularly if you want a simple life. (See my last piece.)

3. How cheap a mortgage is in comparison to the base rate is also worth considering, as I explained above.

Just to make it clear: forecasting is not on the list.

• Watch our video: Getting through the mortgage maze
• Read: Now is the time to fix your mortgage

Use lovemoney.com's innovative new mortgage tool to find the best mortgage for you online

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

Please note that this piece has been written with homeowners in mind, not buy-to-let landlords.