Borrowers turning to variable deals

by John Fitzsimons on 28 August 2009  |  0 comments
Tweet

With Base Rate unlikely to move for some time, the popularity of trackers is rocketing.

I can be a bit like a broken record when talking about fixed rate mortgages. For all of 2009, I have banged on and on about why now is the time to fix for the long term (which realistically means five years, rather than go for one of the even longer term products out there).

The thinking is pretty simple - while you might be enjoying lovely low payments on your variable deal at the moment, as soon as Base Rate starts to move upwards, the price of fixed rate deals will start to move upwards, and that attractive five year fixed deal you have your eye on at the moment will start to look a little less attractive.

The trouble is, Base Rate isn't moving upwards. It's rooted at 0.5%, and in all likelihood will be for some time yet.

That would explain why John Charcol, one of the biggest mortgage brokers in the UK, reported the proportion of its clients opting for variable mortgages had DOUBLED in the past month. While 17% of borrowers using Charcol went for variable deals in June, July saw 35% opt for a variable deal.

Clearly, many borrowers have taken the viewpoint that as and when Base Rate does start to move upwards, it will do so relatively slowly. Say they sign up for the market-leading two-year tracker from Royal Bank of Scotland, which tracks Base Rate plus 2.39% and is available up to 80% loan-to-value. That leaves them paying 2.89% for the foreseeable future - far lower than most fixed rate deals.

And even if Base Rate moves up to 3% by the end of the term, they will still only be paying 5.39% - still relatively competitive.

Even better, if they are sensible and overpay a decent chunk each month, they will build up their equity in the property at a great rate, which will help significantly when the time does come to remortgage.

Overall, I can certainly understand why borrowers are going for variable deals, though personally I still would prefer the security of knowing what I will be paying each month. While the boffins are all agreed Base Rate will stay low for a fair old while, it's not that long ago they thought it would be hitting 6%.

Things can change, and change quickly, and that's the risk you take with a tracker.