Should you get a fixed rate or a tracker?

by John Fitzsimons on 16 April 2010  |  2 comments
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With interest rates languishing at record lows, is now the time to take advantage with a tracker, or go for the safe option of a fixed rate?

Today's debate is on which is the best type of mortgage to go for at the moment - a super-cheap tracker, or the security of a fixed rate?

We asked our very own mortgage expert, Tim Wilson, and David Hollingworth, head of communications at L&C Mortgages to tell us what they think.

David Hollingworth, head of communications at broker L&C Mortgages

Take a tracker!

The perennial dilemma for borrowers is whether to opt for the certainty of a fixed rate or for a variable rate, which could go up or down as interest rates fluctuate. This decision causes so much stress because the honest truth is that no-one can tell you which will work out to be the cheapest until the deal has ended.

Choosing the type of mortgage deal will always involve some crystal ball gazing and economic forecasts will be central to many borrowers decision.  This time last year the majority of borrowers were tuning into the expectation for interest rates to rise sharply and the majority rushed to fix their mortgage rate as a protective measure.

However, over the course of the year those forecasts changed markedly and the current consensus is that if Bank Base Rate does move at all this year it is likely to be only a slight increase. Not only that but many are suggesting that there will be little upward pressure on Base rate for some time to come.

If that expectation is correct then a variable deal could be the right option as they offer a lower initial rate than a fixed deal. If Base rate stays low then so does the mortgage rate resulting in a happy borrower. Even if base rate increases there is plenty of slack to be made up between the tracker and the fixed rates. 

The timing of any rate increase will also have a bearing and the longer that Base rate stays low the more likely the tracker will still work out cheaper, even if the rate eventually ends up a little higher than the fix.

Borrowers could even overpay on their tracker rate to make the most of the lower rates now and reduce the mortgage more quickly.  This will, in turn, leave them in a better position when rates do finally start to climb.

Ultimately borrowers will have to stress test their monthly budget to see how well they could cope with hikes in the Base rate.  There will be some that prefer or need to know exactly where they stand and are prepared to pay for that security.  In that case I wouldn’t try to dissuade them from looking at a fixed rate.  However, those that can afford to absorb fluctuation if rates do rise more rapidly than expected, are likely to be very well served by a good tracker rate.

Tim Wilson, mortgage sales manager at lovemoney.com

Stick with a fixed

This is a conversation that is happening all over the UK. Everyone has an opinion on it from experts to friends, sitting round the dining table talking about their own experience with their mortgage.

I guess really there is no right or wrong answer to the question and it would depend on everyone’s attitude to risk, but if you want to know what I would do if I was arranging my mortgage at the moment, then it would be to fix.

If you look back historically at where the mortgage market was and where it is now, the rates are incredibly low. As a result, this could be a great opportunity to grab a low fixed rate. For example, I bought a house four years ago and was quite happy that I got a good deal – a fixed rate at 5.19% for two years.

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In the market now you can get a fixed rate of 4.79% for five years!

If five years ago someone offered you a fixed rate for five years with an interest rate below 5%, in all likelihood you would have bitten their arm off.

I am a big fan of taking a long look at your budget figure and affordability position, and also advise having a cautious approach to finance. If you have a certain budget in mind for your monthly mortgage payments, and it is affordable, then fixing under your budget would free you from stress about where the interest rates are going to go.

Let’s be honest, we can all talk about where we think rates are going to go all day, but nobody can actually predict the future. I always say that it doesn’t matter what the market does, it’s what you do. Why worry about the rates when you can fix it, sit back and pay your mortgage comfortably and not have to check to see if your mortgage payments are going to increase next month.

I suppose the next question would be, how long you would fix it for? I think a good four to five year fixed rate is sufficient. That’s long enough for us to hopefully get over the current strange market, but not so long so that you are not tied in for too long.

So fix now for stability on your mortgage payments and have less stress when the Bank Base Rate increases, as it will.

So what do you think? Would you go for a fixed rate or a tracker? Let us know your views via the comment box below!