Do you get a short-term fix, or are you looking for a long life? How about a five-year fix? One Fool considers the pros, cons and figures of some different mortgages.
We regularly write about why you should switch mortgages, such as in the recent article Is It Worth Remortgaging? We show that if you don't frequently compare mortgages and switch from the always-expensive standard variable rate (SVR), you could be losing around £500 a year.
However, you don't just have to choose between switching every few years and languishing on an SVR. You might choose to get a 'lifetime tracker' mortgage. These are variable rate mortgages which go up and down with the Bank of England base rate. Typically, they 'track' at just over the base rate, e.g. by the base rate plus, say, 0.4%. When the base rate goes up by 0.25%, so does your mortgage, so that it's always just 0.4% above. It goes down in the same way when the Bank lowers interest rates.
At the moment, SVRs are about 2% higher than the base rate and they're not guaranteed to be linked to it, which is why they are not competitive as lifetime trackers.
I'm going to compare lifetime trackers with fixed-rate mortgages. The latter type of mortgage requires you to switch every now and then in order to keep the rate fixed and to avoid being shunted onto the mortgage provider's SVR.
Here are the best lifetime tracker and fixed-rate mortgages I could find:
Top five lifetime tracker mortgages
Mortgage provider | Current | Base rate + | Fee |
|---|---|---|---|
Nationwide BS | 4.93% | +0.18% | £498 |
Market Harborough BS | 4.99% | +0.24% | £895 |
John Charcol | 4.99% | +0.24% | £1,770 |
Hinckley & Rugby BS | 5.00% | +0.25% | £748 |
Pink Home Loans | 5.09% | +0.34% | £1,314 |
Data from Moneyfacts. Based on an £88,000 repayment
mortgage, remortgaging for 20 years.
Top five fixed-rate mortgages (fixed for five years)
Mortgage provider | Fixed | Equivalent to | Fee |
|---|---|---|---|
Bradford & Bingley | 5.05% | +0.3% | £1,039 |
Yorkshire BS | 5.14% | +0.39% | £1,075 |
Cumberland BS | 5.16% | +0.41% | £915 |
Stroud & Swindon BS | 5.19% | +0.44% | £974 |
Alliance & Leicester | 5.19% | +0.44% | £999 |
Data from Moneyfacts. Based on an £88,000 repayment
mortgage, remortgaging for 20 years.There are no early
redemption fees after the introductory periods for these
mortgages.
Now, let's look in more detail at the two mortgages at the top of these tables. The true cost over five years, including start-up fees (but excluding legal fees) is £37,100 for Bradford & Bingley's fixed-rate mortgage, and it's £35,600 for Nationwide Building Society's lifetime tracker. So, over five years you'd save £1,500 with Nationwide's lifetime tracker, assuming interest rates don't change.
However, the costs to you of Bradford & Bingley's mortgage are fixed and therefore always known, whereas the costs for the Nationwide's are variable. A 0.25% rise in one year's time will mean the total cost over five years will jump almost £600. Another rise a year after that would mean another £400, cutting the saving on this mortgage down to £500. Interest rate rises could easily happen earlier and more often, which would make this mortgage more expensive.
On the other hand, rates could go down. Plus, if you go for the five-year fix you'll have to switch again at the end of the period, so you'll have to pay for another lot of start-up costs. This adds an additional price in return for budgeting stability.
Another option would be to get a short-term fix. Not suitable for drug addicts, but is it possibly just the thing to give a buzz to true Fools? Looking at the figures, you can get a two-year fixed rate deal from some providers for less than the Bank of England base rate. West Bromwich Building Society, for example, fixes its rate at 4.65% with start-up fees of £449 and no early redemption fees after the two years. You'd pay £15,200 over two years, compared with £14,900 over the same period from Nationwide's lifetime tracker, so the lifetime tracker is still cheaper.
However, one interest rate rise a year from now would mean about a £15,000 total bill with Nationwide over two years, making the saving a more modest £200ish, or £100 per year. But you have to consider the possibility of two or more quick rises as well. On the other hand, with the two-year deal you'll again have to spend more on start-up fees when you switch your mortgage.
It seems that regardless of the length of a fixed-rate mortgage, it comes down to the choice between a small premium for stability, versus the risk of several rate rises. It'll take a few rises earlier on to make the lifetime tracker non-competitive.
I'll leave you with one final thought. With the huge competition in the industry, and with more than 8,000 mortgages to choose from, there must always be a better deal out there. It's not likely that you can go wrong by renegotiating with your current provider, or by switching mortgages every few years. Plus, you can always haggle about the start-up costs!