This type of mortgage promises to solve all your mortgage dilemmas...
If you’re looking for a new mortgage, you probably have one burning question above all others: When will interest rates rise?
After all, if you knew the answer to this question, you would find it much easier to decide between a fixed rate mortgage, which will become the cheaper option if interest rates rise, and a tracker mortgage, which is the cheaper option right now.
Just take a look at the following table, which shows the average rates for two-year mortgage deals across the market right now:
|
Type of mortgage |
Average rate across the market |
|
Two-year tracker rate |
3.58% (Base Rate + 3.08%) |
|
Two-year fixed rate |
4.22% |
Source: Moneyfacts
As you can see, two-year trackers are only about half a percentage point lower than two-year fixed rates at the moment. So the Base Rate only needs to rise from 0.5% to 1.25% at some point over the next two years for the fixed rate to become the cheaper rate.
The good news
The good news is, this week, we can make a better prediction about the future of interest rates - at least in the short term - than we could last week. Why? Because of the Bank of England’s decision to pump an extra £75 billion into the economy, a policy known as ‘printing money’.
Central banks don’t tend to print money (which boosts growth and inflation) and put up interest rates (which dampens down growth and inflation) at the same time. Strategy-wise, it would be like applying an accelerator and the brakes to the economy simultaneously - pointless, and probably a bit stupid.
Of course, I can’t personally vouch for the intelligence of those sitting on the Bank of England Monetary Policy Committee (which sets interest rates each month). But at least they’re not politicians. So I reckon it’s pretty safe to conclude that if they had any plans to put up interest rates in the next three to six months, they wouldn’t have decided to print money last week.
The two-year deal dilemma
This doesn’t really answer that burning question, though, does it? Predicting interest rates won’t rise in the next few months doesn’t necessarily make it easier to decide whether to go for a two-year fixed rate or a tracker.
Let’s imagine you go for, say, a two-year tracker over a two-year fixed rate. You’re likely to pay less over the next three to six months. But if interest rates start rising in six months’ time, then you’ll have to pay increasingly more each month. So you could end up paying more over the two years of the deal than you would with a fixed rate.
But if you go for a fixed rate, there are certainly no guarantees that this will prove the cheaper rate. The economy may still be struggling in six months’ time, and interest rates may be just as unlikely to rise as they are today. And you’ll be locked into an expensive fixed rate, paying more than you would on a tracker.
So what should you do?
The clever choice
Luckily, your options aren’t simply limited to two-year trackers and two-year fixed rates.
For example, you could consider locking into a five-year fixed rate. It’s very likely that interest rates will start to rise at some point in the next five years, and when they do, you’ll be laughing, having locked in for years and years, when interest rates were low. You’ll also avoid paying remortgaging fees every two years.
Unfortunately, as with two-year fixed rates, this means you’ll have to pay more in the near future (the average five-year fixed rate is 4.73% at the moment, according to Moneyfacts). And if interest rates don’t rise in the next year or two, you may start to resent this and wish you had taken out a tracker instead.
An alternative option - and my personal favourite right now - is to go for a lifetime tracker that doesn’t have any Early Repayment Charges (ERCs). These deals allow you to remortgage at any time without penalty. So you can enjoy a cheap, tracker rate while interest rates are low - but the moment that Base Rate starts to rise, you can ditch your tracker and switch straight into a short- or long-term fixed rate.
Best of all, some of these deals are available with just a 10% deposit. Of course, the more equity you have in your home, the cheaper the rate will be - if you only need to borrow at 60% loan-to-value (LTV) or less, you can get a fee-free rate from HSBC that’s as low as Base Rate +1.99%!
Best lifetime trackers without ERCs
Here are the best ERC-free lifetime trackers available right now at different loan-to-values:
|
Loan-to-value (LTV) |
Lender |
Rate |
Product fee |
|
60% |
2.49% (Base Rate +1.99%) |
£0 |
|
|
60% |
2.89% (Base Rate +2.39%) |
£0 |
|
|
60% |
2.55% (Base Rate +2.39%) |
£945 |
|
|
70% |
3.39% (Base Rate +2.89%) |
£0 |
|
|
70% |
2.95% (Base Rate +2.45%) |
£995 (but you get £250 cashback) |
|
|
70% |
2.89% (Base Rate +2.39%) |
£945 |
|
|
80% |
2.99% (Base Rate +2.49%) |
£599 |
|
|
80% |
3.29% (Base Rate +2.79%) |
£0 |
|
|
80% |
3.19% (Base Rate +2.69%) |
£945 |
|
|
90% |
4.59% (Base Rate +4.09%) |
£599 |
|
|
90% |
4.99 (Base Rate +4.49%) |
£0 |
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 8045 or email mortgages@lovemoney.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.