If you're on the verge of remortgaging, a tracker may prove a better deal right now than a fixed rate.
Last week the Monetary Policy Committee cut the Bank of England base rate by 0.25% - the third such drop in six months.
This means the base rate is now just 5%. But the cuts have provided little respite for mortgage borrowers on fixed rate mortgage deals.
For those who are fortunate enough to have a base rate tracker mortgage, however, it is a different story. These borrowers will now enjoy lower monthly repayments.
The base rate is expected to fall even further over the course of the year, so there could be more good news for those of you on tracker deals.
But does this mean we should all be getting in on the act? If you're one of the 1.4 million people who have a fixed rate mortgage deal coming to an end this year, should you go for a tracker now, instead?
The Credit Crunch
In recent months, mortgages have generally become more expensive as lenders grow increasingly picky over who they are willing to lend to. That's thanks to the credit crunch which has pushed up mortgage rates - particularly for trackers - while tightening lending criteria at the same time.
In light of these tough conditions, I'm almost reluctant to include mortgage tables as some of the more popular deals seem to disappear from the market alarmingly quickly. Just this week, HSBC pulled its market-leading 4.99% two year fixed rate, leaving borrowers with even less choice. Read more about that here.
That said, you still need to know what's out there right now. If you see something you like the look of, then I would suggest you act straightaway.
So, let's kick off with a look at the fixed rate best buys:
Top Fixed Rate Mortgages
Lender | Rate | Fixed Period | Maximum loan to value | Fee |
|---|---|---|---|---|
Newcastle BS | 5.15% | To 31.05.10 | 90% | 2.5% of loan amount on completion, reservation fee £50 |
HSBC | 5.39% | To 30.06.13 | 90% | £999 |
Cheshire BS | 5.49% | Two years | 95% | £1,499 |
Abbey | 5.49% | To 02.07.11 | 90% | £675 |
Bradford & Bingley | 5.59% | To 31.05.10 | 95% | £999 |
Bradford & Bingley | 5.59% | To 31.05.11 | 95% | £999 |
Source: Moneyfacts. Mortgages which apply early repayment charges beyond the fixed rate period have been excluded.
As you can see, the most competitive fixed rate of 5.15% from Newcastle Building Society is certainly attractive if you have at least 10% equity in your home. In other words, you can apply for this deal if you don't need to borrow any more than 90% of its value. But there's one major drawback: a 2.5% fee on completion. If you borrow say, £150,000 that would set you back a staggering £3,750 for the privilege.
You may be more tempted by HSBC's deal, which offers a competitive fixed rate of 5.39% until 30 June 2013 but with a much lower fee of £999.
Alternatively, if your fixed rate is about to come to an end you could take a look at HSBC's Rate Matcher offer. This deal can match the rate on your existing fixed rate mortgage providing a lifeline if you're concerned about payment shock. Not surprisingly, there are strings attached. For one thing, you'll need at least 20% equity in your home and you may have to pay a hefty fee. Read HSBC Rides To Homeowner's Rescue! for all the details.
It's certainly still possible to get a decent fixed rate, but many of the largest lenders are falling behind having recently upped a number of rates. Nationwide, for example, offers two year fixed deals at rates between 6.3% and 7.4% depending on how much equity you have and whether you pay a fee. These are crazy rates given that its standard variable rate, which is traditionally the most expensive type of loan, is due to drop to 6.49% at the beginning of May.
Meanwhile, Halifax's two year fixed rates range between 6.19% to 7.29% depending on whether you go to a broker, how much you pay in fees and how much equity you have.
Whatever deal you go for, the likelihood is that the higher the equity in your property, the better the rate you will get. Alas, if the value of your home has begun to slide, more expensive loans could be in store for you.
Top Tracker Mortgages
So let's look at tracker mortgages. Many observers think that the Bank of England's base rate is set to fall later this year, and if you have a tracker mortgage, your mortgage rate will fall in line with the declining base rate.
And the same thing will happen if you take out a new tracker mortgage now.
However, bear in mind that rates for new tracker mortgages may continue to be hit by the credit crunch for a while yet. That's because when you take out a tracker mortgage, the lender sets the margin between the base rate and the tracker rate that you will pay. So, for example, your tracker might be 1% higher than the base rate (BBR +1).
This margin is affected by LIBOR -- the rate at which banks lend to each other -- and LIBOR has been pushed higher by the credit crunch. In other words, the rate at which banks are lending to each other is rising, which means the rates at which they lend to you must also rise to compensate for higher funding costs. And so the margin for some new trackers is high.
That said,there's still a lot to be said for trackers, and the best buy deals look attractive. Take a look at these deals:
Lender | Rate | Period | Maximum loan to value | Fee | Tracker description |
|---|---|---|---|---|---|
HSBC | 5.48% | Lifetime | 90% | £599 | BBR + 0.48% for the term |
Bradford & Bingley | 5.54% | 2 years | 95% | £999 | BBR + 2.09% for the term discounted by 1.55% for first 2 years |
Chelsea BS | 5.59% | 2 years | 90% | £3,750 | BBR + 0.34% for 2 years then BBR + 1.99% for the term |
Co-operative Bank* | 5.64% | Lifetime | 90% | £699 | BBR + 0.64% for the term |
Cheltenham & Gloucester | 5.64% | Lifetime | 80% | £1,094 | BBR + 0.64% for the term |
Halifax | 5.72% | To 30.06.11 | 90% | £999 | BBR + 0.72% for 38 months then reverts to SVR (currently 7%) for the term |
Source: Moneyfacts. Mortgages which apply early repayment charges beyond the initial tracker period have been excluded. BBR = bank base rate. SVR = standard variable rate
*This deal is only available at the rate shown until close of business on 17th April.
I like HSBC's lifetime tracker for three reasons: firstly, it offers a guarantee that the interest rate will be just 0.48% above the base rate for the entire term. Secondly, the fee is reasonably low at £599. And thirdly, there's no early repayment charge, so you can remortgage to a fixed rate without penalty if interest rates begin to creep up.
Fixed rates are always best for borrowers who need the security of knowing their repayments will never increase beyond a set level for the duration of the fixed rate.
If, however, your nerves and your budget can cope with a variable rate tracker mortgage, I would consider giving fixed rates a miss for now (unless you can get a best buy). If the base rate comes down even further this year - and that's looking like a distinct possibility - I think trackers will generally offer better value for money.
More: Your Mortgage Lender Is Going To Rip You Off | Get whole-of-market help and advice from The Motley Fool Mortgage Service