Fixed rate or tracker? Here’s what the mortgage gurus have to say

Published 16th Jan 2010

As the economy slowly climbs out of recession, millions of homeowners are facing a dilemma. Is it time to take advantage of low interest rates to fix your mortgage for the long term or to opt for a cheaper tracker rate pegged to the Bank of England base rate, which could rise over the next year or two?

Here Times Money brings together a panel of economists and mortgage brokers to explain their base rate predictions and to tell us how their forecast has informed their mortgage choices. Then we look at the options for those moving up the property ladder, those wanting to remortgage and first-time buyers.

He says: “The base rate is currently at an emergency level and there is a need to return to more ‘normal’ levels of interest rates. The recovery will be stronger than most commentators are suggesting and inflation will be a significant problem.”

Ray Boulger, senior technical manager, John Charcol says: “The risks to the economy clearly remain. After the general election there will be very big cuts in public spending, likely to involve a large number of redundancies, which will be a big drag on the economy. The housing market also remains fragile.

“While inflation is set to rise over the coming months, the Bank of England predicts that it will fall back down below 2 per cent by the end of the year.”

Current mortgage: A lifetime tracker from Woolwich, pegged at 0.19 points above the Bank of England base rate, a current pay rate of 0.69 per cent. He says: “I plan to stick with the lifetime tracker for the time being.”

Simon Rubinsohn, chief economist, Royal Institution of Chartered Surveyors

Base rate prediction: Increase to 1.5 per cent by the end of 2010, creeping up to 2 per cent by the end of 2011.

He says: “The Bank of England will be reluctant to pull the trigger and raise rates. We are entering a period when interest rates will generally remain low. The lack of available finance will mean that even if we have a strong quarter of growth or even a full year, the Bank will be deterred from raising rates.”

Current mortgage: An offset base-rate tracker. He says: “I don’t see rates going up very aggressively. There are significant challenges facing the economy and while I don’t expect a double dip, it won’t be plain sailing. That will keep a lid on interest rates.”

Melanie Bien, director, Savills Private Finance

Base rate prediction: Steady at 0.5 per cent until at least the end of 2010, slowly rising to 2 per cent by 2012.

She says: “We are in a low interest-rate cycle so even when rates do start to rise, they are likely to do so slowly and I wouldn’t expect them to go above 2 per cent in the next couple of years.”

Current mortgage: A standard variable rate (SVR) pegged at 0.99 per cent above base, a current pay rate of 1.49 per cent. “This is a brilliant rate and I, therefore, intend to stick with it for the time being as I am benefiting from super-low monthly payments.”

Advice for those moving house

Competition among lenders has pushed down mortgage rates in recent months and tracker deals have seen the biggest cuts. HSBC is introducing a new lifetime tracker from Monday pegged at 1.99 points above base, a pay rate of 2.49 per cent. The deal has a £999 fee and is available up to 60 per cent of a property’ value.

David Hollingworth, of London & Country Mortgages, the broker, says: “Borrowers who put their faith in these predictions will likely opt for one of the current crop of competitive tracker deals. However, homeowners should only take on a deal that they can afford in all scenarios, including a jump in rates later this year.”

A borrower with a £150,000 capital repayment loan on the HSBC deal would pay £672 a month with the base rate at 0.5 per cent. If it rose to 2.5 per cent, repayments would rise to £832.

Borrowers who are concerned about potential interest rate rises could opt for a capped tracker deal, which limits how far the pay rate can climb. Yorkshire Building Society is offering a two-year tracker at 2.49 points above base, a pay rate of 2.99 per cent, which is capped at 4.99 per cent. It has a £495 fee, available up to 75 per cent of a property’s value.

Alternatively, borrowers may decide to pay more for the security of a fixed rate, which could be cheaper over five years if interest rates rise further than thought. Brokers suggest that it is better to fix for the longer term to avoid having to remortgage when interest rates are likely to be higher. Leeds Building Society has a five-year fix with a rate of 4.75 per cent, available up to 75 per cent loan-to-value (LTV), with a £999 fee.

Advice for first-time buyers

There are currently 136 mortgage deals available for up to 90 per cent of a property’s value, the maximum currently available from most lenders, compared with only 71 in May last year, according to Moneyfacts.co.uk, the financial website.

The cheapest interest rates for borrowers with a small deposit are also trackers, but the margins are considerably higher than deals reserved for cash-rich borrowers.

The Royal Bank of Scotland is currently offering a two-year tracker deal pegged at 4.19 points above base, a pay rate of 4.69 per cent, available up to 90 per cent loan-to-value. It has no fee, but the maximum loan size is £150,000. If the base rate rose from 0.5 per cent to 2.5 per cent, monthly payments on a £150,000 capital repayment loan would rise by almost £200, from £850 to £1,030.

Mr Hollingworth says: “First-time buyers have traditionally paid more for the security of a fixed rate because it removes any uncertainty about future repayments.”

The most attractive fixed-rate deal available for up to 90 per cent of a property’s value is from Saffron Building Society, at 5.89 per cent, with a £995 fee.

Advice for remortgaging

Homeowners benefiting from cheap SVRs are hardly rushing to remortgage in the current market, a trend that is likely to continue this year. However, not all borrowers on low SVRs can afford to sit back.

Mansfield and Marsden building societies are the latest lenders to raise SVRs, adding hundreds of pounds to the cost of mortgage deals, and other building societies have SVRs as high as 6.45 per cent. Mr Hollingworth says: “Homeowners on an SVR should be careful. When the base rate does finally go up, lenders are likely to react by increasing their SVRs by more than the base rate.”

Case study: ‘We listened to broker’s advice’

Andrew Jones and his partner Caroline Jebbett (pictured above) have taken out a new lifetime tracker deal from Woolwich pegged at 2.29 points above base, a current pay rate of 2.79 per cent. It had a £999 fee.

Mr Jones, 38, a crew manager for the Greater Manchester Fire and Rescue Service, and Ms Jebbett, 40, spoke to a number of lenders and looked on price comparison websites before consulting a high street mortgage broker.

Mr Jones says: “We listened to the advice from my broker, who explained the different deals available and made recommendations based on what I could afford.”

The couple are borrowing £183,000 by remortgaging their four-bedroom home near Blackpool. It was valued at £285,000, giving the couple a loan-to-value ratio of about 65 per cent.

Mr Jones says: “I can’t see rates going up massively in the next two or three years, but I went through all the possible scenarios with my broker to make sure that I could afford the higher mortgage payments if it did happen.”

The couple decided that the saving in choosing a cheaper tracker outweighed the benefits of a long-term fixed rate.

Source: ' Times '

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