Can't decide whether to lock into a mortgage rate or take a chance on a tracker? We round up the best of both
Do you take a fixed rate mortgage so you know what your repayments will be for a set period? Or should you choose a variable rate that will minimise your monthly payments now, but could rise in line with interest rates.
It’s an important question because when you take out a mortgage, whether your first or your fifth, getting it right can make a difference of hundreds of pounds a month. Or even worse, the difference between meeting your repayments or falling into arrears.
So which is best?
Fixed v tracker
The truth is, there is no best, and that’s why choosing a mortgage can be so difficult.
Different deals suit different people, depending on your deposit size, income, general financial affairs, attitude to risk, view on interest rates and personal circumstances. So it’s impossible to say that everyone should go for a fixed over a tracker rate, or vice versa.
John Fitzsimons explains why the best mortgages offer you a bit of flexibility
However, people place a great deal of stock on which way interest ways are set to move, because this will determine which type of deal could work out cheaper over a set amount of time.
It’s vital to remember that nobody actually knows what is going to happen to interest rates in the future. Even the Monetary Policy Committee that sets rates doesn’t know for sure, because they base their decisions each month on the latest economic data and indicators.
Nevertheless, the last week has been particularly illuminating on giving us a clue about whether Base Rate will stay at its record low of 0.5% for much longer.
Rate expectations
The Bank of England’s Quarterly Inflation Report was pretty gloomy overall, predicting that economic growth is likely to be weaker than had been expected three months ago.
It also forecast that inflation will stay higher than target for longer than previously thought. The Bank now thinks that the Consumer Prices Index will stay above its 2% target until the end of 2011, but it says that it then expects inflation to fall back down.
Under normal circumstances the Bank would increase interest rates to tackle this high inflation, but of course we haven’t been experiencing normal circumstances for quite some time!
Indeed, the recent speculation over a double dip (although the Bank of England doesn’t forecast one), and the latest indicators on house prices and retail spending point to an even more fragile economy than many had thought.
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That means it is much less likely that rates will be increased, because the economy needs all the help it can get, and the Bank of England seems willing to accept temporarily high inflation as a price. At least for now.
No guarantees
Despite clear signs that rates will stay low for longer, there are no guarantees, something the Bank made clear this week, saying it was ready to move in either direction.
And consumers are clearly getting the jitters, with many now jumping to the safety of a fixed rate mortgage.
According to the Council of Mortgage Lenders, a massive 48% of borrowers fixed their rate in June, the highest proportion so far in 2010.
This is partly because fixed rates have fallen in price in the last couple of months. But it’s also because people are starting to worry about the economy.
This proves the point that the direction of interest rates isn’t the only factor when it comes to choosing a mortgage. Many people have more pressing concerns, including rising food prices and looming job cuts. In an uncertain economic environment certainty is very valuable indeed, even if you do have to pay a premium for it.
According to Nationwide, consumer confidence dropped in July for the third month in a row and is now down at levels not seen since May 2009, right in the middle of the credit crunch. People are particularly concerned about the amount they will have to spend in the next six months according to the lender.
Little wonder that the prospect of knowing exactly what your outgoings will be for the next few years is a very appealing one.
The best thing to do is to take out a deal that suits your circumstances. If you want to take advantage of the cheapest mortgage deals and you can soak up a fair few rate rises if they happen, a tracker rate might prove a good choice, at least over the next 12 months.
If you can’t afford to be wrong a fixed rate could be right for you. Even though they are more expensive than trackers, and priced at a wide margin to swap rates, it’s worth remembering that historically current fixed rates are not high at all.
Whatever you go for, here’s some of my favourite current deals:
10 top trackers
|
LENDER |
TYPE OF DEAL |
RATE |
FEE |
MAX LTV |
|
2-year discount |
2.19% (Base + 1.69) |
£599 |
70% |
|
|
Term tracker |
2.19% (Base + 1.69) |
£99 |
60% |
|
|
2-year tracker |
2.19% (Base + 1.69) |
£999 |
60% |
|
|
2-year discount |
2.25% (Base + 1.75) |
£995 |
75% |
|
|
3-year tracker |
2.49% (Base + 1.99) |
£999 |
75% |
|
|
Term tracker |
2.49% (Base + 1.99) |
£399 |
70% |
|
|
3-year tracker |
3.19% (Base + 2.69) |
£999 |
85% |
|
|
2-year tracker |
3.49% (Base + 2.99) |
£495 |
85% |
|
|
3-year tracker |
4.29% (Base + 3.79) |
£499 |
90% |
|
|
Term tracker |
4.49% (Base + 3.99) |
£599 |
90% |
10 top fixed rates
|
LENDER |
TYPE OF DEAL |
RATE |
FEE |
MAX LTV |
|
2-year fix |
2.64% |
2% |
70% |
|
|
2-year fix |
2.89% |
£1,295 |
70% |
|
|
2-year fix |
2.89% |
£995 |
75% |
|
|
2-year fix |
3.49% |
£999 |
80% |
|
|
5-year fix |
3.95% |
£599 |
60% |
|
|
2-year fix |
3.95% |
£995 |
85% |
|
|
5-year fix |
3.99% |
£995 |
75% |
|
|
2-year fix |
4.95% |
£995 |
90% |
|
|
2-year fix |
4.25% |
£495 |
85% |
|
|
5-year fix |
5.89% |
£499 |
90% |
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