Fixed Rate or Tracker Mortgages: What to Opt For?

The Bank of England’s decision to leave interest rates unchanged last week has left many homeowners looking for a new mortgage with a difficult question to answer: ‘do I stay on a variable rate mortgage or look to purchase a fixed rate mortgage?’

Use RateGuard insurance to protect your monthly mortgage payments from rising interest rates.

The base rate is 0.5 per cent – and has been for 28 consecutive months – this means that borrowing money is actually fairly affordable, provided you can get a bank to lend you the money in the first place. Since early 2010, financial experts have been arguing about when, or even if, the Bank of England will raise interest rates again.

Analysis by independent financial research company Defaqto has found that average margins, above the Bank of England base-rate, charged by base-rate tracker mortgages have risen sharply since the lowest margins were applied back in autumn 2007 – when a two year base-rate tracker was available at 1.01% below the base-rate for a mortgage up to 90% Loan-to-Value.

At the same time, however, since their peak, which occurred between September 2009 and February 2010, average rates for base-rate tracker mortgages have fallen.

“Those who took out base-rate tracker mortgages in late 2007 proved to have made a very astute financial decision and have enjoyed plummeting monthly repayments over the intervening period for the duration of their tracker,” says David Black, Defaqto’s Insight Analyst for Banking.

“Our analysis shows that while tracker margins have fallen since early 2010 they are still significantly higher than they were in 2007, before the credit-crunch – and this makes the decision-making process even more difficult for borrowers.”

This does leave homeowners with a very difficult decision to have to make. The base-rate can only go one way – up – but the question is when, by how much and how quickly? Those that make the wrong judgment are likely to find themselves significantly out of pocket.

Do I Fix my Mortgage Now?

If you are thinking of renewing your mortgage and are unsure how an increase in interest rates will affect you, be sure to do all of your research before committing – seeking financial advice is always a good idea.

It is worth noting that when interest rates do finally rise, they could quite possibly rise by a considerable amount, quite quickly: if for example interest rates rise by 2 or 3 per cent, which historically, would still leave them very low, would you be able to cope with your monthly repayments? A 3 per cent rise in interest rates could add hundreds of pounds on your repayments each month, depending on the type of mortgage you have.

If the answer is no then you may be better off opting for the security of a fixed rate mortgage.
Having a fixed rate mortgage means homeowners know exactly how much their monthly mortgage repayments will be.  The benefits to this are you know what you have to repay and they are not going to rise above what you can afford.

If you are hoping fixed rate mortgages will offer better deals further along the line then you may look to consider fixing for the short term, for example with a short term 12 month fixed rate mortgage.

Guest post by MoneyExpert

2 thoughts on “Fixed Rate or Tracker Mortgages: What to Opt For?

  1. What is the most agreed worst case scenarion assumption for the base rate rise in the next 24/36 months. Could we be looking at a rise of 5%? more?

    • Base rate is at a historic low of 0.5%, but predicting if, when and by how much interest rate may rise is an impossible task. The average interest rate since 1988 is circa 6%, but this shouldn’t necessarily been taken as indicator of where interest rates will return to (if and when they move upwards). If you are concerned about how a rate rise may affect your mortgage repayments then we would suggest you speak to a Mortgage Consultant to consider Re-Mortgaging (to a fixed rate mortgage) or protecting yourself with RateGuard insurance.

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