[Closed] mortgages - tracker or fixed rate?

Personally I'd go for the lowest and longest fixed you can.
Interest rates will surely rise.
J.

this week's Guardian Money front page article
http://www.guardian.co.uk/money/2009/oct/17/mortgage-interest-rates

I have a personal opinion based on my interpretation of this:
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we've just had 3 year fixed, trackers are hard to get. In fact fixed are hard to get at a decent rate.

I've been in the process of remortgaging and going to a 5yr tracker but at the last moment I've decided to stay on my Variable rate (Currently at 2%) and take out some additional borrowing.

The reasons I did this were....

1. Borrowing was cheaper on my current deal even with an average rate on the additional borrowing.
2. Expectation was revealed last week that interest rates aren't really going to rise much over the next 24 months - why fix at 5.xx% or more??
3. Comments from various industry bods that the current range of deals are non-competitive (due to small amount of people lending, shortage of good products and limited knowledge of what is going to happen meaning more risk aversion)
4. Knackered market rates - look at the graph above - the interest rates when compared against the LIBOR are ****ed - I'm expecting there will be pressure to reduce the gap between interest rates offered and the LIBOR which means products including Fixed rate mortgages will come down in the future or stay at a similar level when rates start to go up
5. The mortgages I've gone for / am on are penalty free so I can monitor the market and swap should things get dicey - I've set a threshold on when to do this.
6. Staying on the rate I am now I am saving £200 per month which I am going to over pay my mortgage with as a minimum.

When I do Fix - hopefully in a years time - I will more than likely fix for five - seven years at the lowest rate I can find at the time.

Hope this helps.

Hi Stoner

Thanks for the link to the article, very helpful, even though the expert opinions seemed evenly split. Can you please explain the graph that you've posted above? I'm sure its straight forward but I can't make head or tail of it.

Thanks

We have just gone 5 year fixed at 6.something on advice of the brokers.

Also what is LIBOR?

Article in the Times on Saturday quoted a CEBR report (released last week) as saying base rate is unlikely to climb above 2% before 2014. Times article is here [url] http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6877998.ece [/url] can't find the CEBR source material though.

EDIT- googled "CEBR base rate", loads of comment on the report, but not the report itself.

LIBOR - its the rate at which banks borrow the money they then lend to you...

So if they borrow it at 2% then lend it back to you at 6% they are taking the michael and making 4% for their greedy little fat cat butts

I explained to my broker my course of action expecting him to give me the hard sell and to stick with the Fixed but he said I was right to do what I was doing and then said he was doing the same as it was going to save him money.

the graph shows historical spreads over base (ie, gap between base rate and retail rate) on key UK mortgages from 1995

http://www.spectator.co.uk/coffeehouse/5411778/browns-double-hit.thtml

Fraser Nelson the author is a very talented economist IMO. His politics can lean a little too far right but when it comes to economics he's usually pretty spot on.

What he hasnt touched on in his article though, but what i think it is really showing (as well as something to come, Ill explain in a moment) is that there's been a structural re-pricing in debt. Spreads should fall back to a long-term level and stabilise pretty quickly after remedial action by the central bank, they haven't.

Also, in the pipeline are some substantial national and international changes to the banking industry. These are going to add large costs to "banking" itself - i.e. making money out of money. Things like capital adequacy strengthening as well as other stability schemes are going to add c.£6bn to the cost of lending each year. That is going to translate to a long term increase in the stable level loan spreads.

Recently I extended an existing tracker loan to its maximum becuase it represents very cheap debt (I pay c.0.85% over base, i.e. 1.35% interest rate at the moment) I doubt Ill ever get a deal like that again so I shall use and abuse it. I have also taken out a short term development loan which is priced at 3.50% over base = 4.0%. In the short term that is fine, but you see the difference in the spreads Ive got, notwithstanding the cost of the base rate.

When I refinance my project in the next twelve months, Im going to have to have to revisit this all. I hope not to interfere with my cheap loan as once it;s gone, it's gone. But I may have to jig some stuff around to make that happen, but its pretty unavoidable that my total cost of funds is going to go up.

As an aside, I have been helping one of my clients arrange a £230m loan that's going to cost them 3.25% over swaps. They will be obliged to buy a 5yr swap which is around 3.25% at the moment - that means a FTSE 100 company is paying 6.5% for its development loan, while Im going to pay 4.0%. Happy days 🙂

To the OP

Question 1 - Do you want/need to know what you are going to be paying each month for the next 2,3,4,5 + years. If so and any increases in monthly payment will be unbearable then go fixed.

Question 2 - If the answer to question 1 is no then what rate will you revert on to with your current lender ?

Question 3 - If the answer to question 2 in circa 4% or above then can you get access to one of the low tracker rates currently on offer. The availability of these rates to you will depend on a number of factors but if you fit the criteria then it may be possible to get a low tracker rate (under 2% to 2.5%) with only minimal tie ins (1% for the first 2 years) so if rates do go up too much then you could pay a small fee and switch out.

If you don't want/need to fixed and don't want to be tied in to a tracker or have a rate that is only slightly above the best tracker rate you can find then why not stay of the lenders standard variable rate ?

Hi BigSi

We're buying a new house and are not able to transfer out mortgage on ou current one. so its a new deal that needs to be done. staying on our current rate would be nice though.

In answer to your first question we could absorb a bit of an increase in costs, but not much. an interest rate rise above 3% would start to hurt alot.

the dilemma is the mental hurdle of feeling that over the 3 year period I could have saved money by choosing one option and the concern that i'll probably choose the wrong one.

We just got a £90,000 mortgage (on a £157,000 house), fixed at 3.98% for 2 years.

Exchange today, move on Wednesday. I will soon own this garage:

[url= http://farm3.static.flickr.com/2612/4021505645_c1945e96f5_d.jp g" target="_blank">http://farm3.static.flickr.com/2612/4021505645_c1945e96f5_d.jp g"/> [/img][/url]

and a 300 foot garden with this little extra bit at the bottom:

[url= http://farm3.static.flickr.com/2674/4022266610_de662fd74a_d.jp g" target="_blank">http://farm3.static.flickr.com/2674/4022266610_de662fd74a_d.jp g"/> [/img][/url]

😀

thats not a garden. Thats a green lane 🙂

I had to take exacly the same decision this year. We owe £150k on a house worth much more than that. I managed to get a 0.49% above base rate, offset against all our accounts, no penalties. That means base rate would need to be above 5.5% before we are worse off than a 6% fixed. I think if it gets there in the next 3-5 years there will be many more people than us jumping off the cliff. And if you think too by Jan 2011 we will have saved so much that it might need to be 10% in the last couple of years before we are worse off.

C

thats not a garden. Thats a green lane

That's just the extra bit. The rest is more garden-like.

Mango - is your mortgage currently not portable?

mangoridebike - Ok so an increase of 3% would really hurt.

I don't feel that interest rates would increase by more than 3% over the next couple of years but you can't gurantee that and nor can anyone else. Its really a case of looking at how much you could save over the period of time you have the rate for, how long are you tied in for and what the early redemption peanlties are ?

Once you know that you can say if you feel the saving over that period of time is sufficent for you to take the risk that rates will stay low during that time or not.

There are some good trackers rates with very low early redemption penalties about at the moment but alot of the fixed rates have also started to drop as some of the lenders still have money to lend this year.

If you want to talk specific figures so i can offer some specific guidance then my e-mail address is in my profile so feel free to use it 😉

miketully - that garden would benefit from a pump track and some shore 😛

miketully - that garden would benefit from a pump track and some shore

I have plans...

BigSi

Thanks for that and for the offer of more help. My wifes cousin, who has done a very good job for us in the past, does exactly the same job as you. I was just wanting to check the views of the stw collective mind to help make the decision.

Bushwhacked - I don't think so, but I'm checking.

Miketually I have severe garden and shed envy - that looks like a lot of fun 🙂

With out stating the obvious the lending market in general but the mortgage one in particular seems to be in a state of contradiction. Not three months ago (July 09) I fixed @ 3.95 for 5 years with no arrangement fee's and they even paid me £100 to take out a current account with the lender (A&L). Yet now the lowest 5 year fix is around 5.5 with a big fee- yet LIBOR has narrowed a fair bit since then. For my tuppence avail of current SVR and look again in 9-12 months.

Don't start a game of garden and shed top trumps,......

C

Miketually I have severe garden and shed envy - that looks like a lot of fun

I am very excited by the garden and garage, stable, tackroom and 2nd garage. I 'scrumped' an apple from the orchard when we were in the garden at the weekend, while sticking some stuff in the garage, and it was lovely.

The benefits of buying our first house in 2000. I feel very lucky - there's no way we could afford this otherwise.

miketully - I bought my first house in 2000 and still couldn't afford to buy somewhere like that, good luck with the plans 😉

miketully - I bought my first house in 2000 and still couldn't afford to buy somewhere like that, good luck with the plans

The national pay scale, while living in a cheap part of the country helps too. £90k mortgage 🙂