In a fix over trackers: Rising prices signal a new dilemma for homeowners

Published 04th Aug 2009

The housing market continues to show signs of recovery, but experts reckon it is too early to say if it will be sustained and predict there will be no rise in interest rates when the Bank of England Monetary Policy Committee meets this week to decide if the base rate should stay at 0.5 per cent.

Mortgage approvals are rising and Nationwide Building Society said on Thursday that house prices had risen for the third consecutive month in July.

For borrowers looking to remortgage as their current deal comes to an end, the dilemma of deciding between a fixed or tracker rate has never been thornier.
Confident: Peter and Christine Owen believe their tracker mortgage will leave them better off than a fixed-rate loan

The difference between the best fixed rates and tracker deals has widened in recent weeks as fixes have become more expensive. As a result, some trackers have started to look more attractive.

For example, Alliance & Leicester, now part of Spain's Santander, has a two-year tracker at 2.45 percentage points above the base rate, giving a starting pay rate of
2.95 per cent.

By comparison, the best two-year fix is with First Direct at 3.34 per cent. The best five-year fixed rates start from 4.8 per cent.

'Borrowers who want payment certainty should always fix,' says Ray Boulger at mortgage broker John Charcol. 'But for those who are prepared to gamble that low interest rates will be with us for a long time, a tracker may be the better option.'

At the moment, Boulger prefers lifetime tracker deals with no exit penalties. These allow borrowers to enjoy low rates, but with the option to fix at a later date if rate rises start to become financially uncomfortable.

Homeowners with at least 40 per cent equity in their property can get a lifetime tracker with HSBC at 2.24 points above the base rate.

Peter and Christine Owen from Barnoldswick, Lancashire, have just opted for a tracker loan because they are confident interest-rates will stay low. But their loan with Alliance & Leicester has penalties if they want to switch to a fixed rate in the first two years.

The rate on their loan tracks at 2.59 points above the base rate, giving a starting pay rate of just 3.09 per cent. It is available to borrowers with at least a 30 per cent deposit or equity in their home.

'The tracker was lower than any of the fixed rates we were being offered by lenders,' says Peter, 54, director at a builder's merchants.

'We have flexibility in our household budget so if rates do rise over the next two years we could cope. My view and hope is that we will end up better off overall than if we had taken a higher fixed rate now.'

Peter and Christine, 50, who have two grown-up children and are proud grandparents to Jack Peter, born in April, paid a £995 arrangement fee, but got their valuation and legal costs on the remortgage refunded on completion.

David Hollingworth at broker London & Country in Bath, Somerset, says that highly competitive tracker deals are still available for borrowers who can afford to take more of a gamble on future rates. But they must act fast.

'The mortgage market is still volatile with deals being changed and pulled weekly,' he says. 'Borrowers should get advice well in advance of their current mortgage deal coming up for renewal.'

Michael White at broker email mortgages based in Bloomsbury, central London, warns borrowers who want to move from a variable rate loan to a fix not to delay. 'Fixed rates are unlikely to fall further,' he says.

'Borrowers who think they can time the market and jump into a fix once rates start to rise will miss the boat. If lots of borrowers try to bag deals at the same time, there could be a stampede and the best deals could be missed.'

The market is still particularly difficult for first-time buyers with a small deposit and remortgage borrowers with less than 20 per cent equity in their homes.

Brokers say many big lenders are still reluctant to lend in this sector and rates are considerably higher than those offered to borrowers with a more sizeable equity stake.

For example, the best fixed rate over two and five years for borrowers with ten per cent equity is 5.99 per cent.

Source: ' Daily Mail '

View All Latest Articles