Tracker to fixed (not your usual comparison)

straddie

Hi,

I've posted previously on here about our remortgage to First Direct. We originally secured a 10 year deal at 6.19% back in July (at the peak before rates began to fall again) but then switched to their fee free life time tracker of +0.79% before the remortgage went through in November.

Obviously we're pleased at that decision as we've benefitted massively from the recent base rate cuts, however I'm very aware of the fact that such low rates will not last for ever. We still have our 10 year deal on hold, it expires in early Jan, and we are still able to switch to it if we want to. Now jumping voluntarily from 2.79% to 6.19% seems ludicrous on the face of it, but with the long term historical average being much higher than over the last decade, and with interest rates looking likely to have to rise quite some way in the medium term to try and dig us out of the massive hole this government has got us into, I'm unsure whether I might end up regretting not taking the 10 year deal in a couple of years!

I know nobody is equipped with a crystal ball but I would be interested to hear the views of those older and more experienced than myself and who have been through previous economic turmoil (though some would say the current climate is unprecedented!), and what you would do in this situation (this is only our second mortgage deal). I know there are many fixed vs tracker posts on here, but this situation is a bit different in that we already have both deals secured and available to us so it's not like we're starting from scratch - we wouldn't be considering taking up such a deal right now if we didn't already have it on hold. The only expense we would incur is an arrangement fee of £399 on the fixed (we already paid the booking fee back in July so we've lost that regardless).

For the record, our current thinking is to stick to the tracker and hope that by overpaying as much as we can whilst rates are low, we will offset any increase in rates beyond the 6.19% in the longer term. That said, we did originally set out to get a medium to long term fixed deal for added security at a time when we may choose to start a family etc, so even though I feel we could handle the risk a tracker carries, we would still prefer the peace of mind of a fixed. We just don't want to pay over the odds for it (though I would expect to pay some kind of premium for it).

One final point I should add - I'm aware that there may be better fixed deals around next year as base rates fall further and LIBOR drops. However, our LTV was 80% back in July and will obviously be higher than that now and could well get worse if prices continue to fall faster than we can overpay. So it's not like we'll be in a position to pick and choose any deal we want if/when they appear.

Thanks in advance,

Straddie

luckyfool

Well, I agree with your rationale about fixing now (or in next 6-12 months) for the medium or longer term, however given that you can get a 10 yr fixed from C&G at 4.99%, I fail to see why taking one at 6.19% from First Direct makes any sense.

Joe_Bloggs

As a complete ignoramus, that lifetime tracker looks good. You can hedge your bets by pretending you are on 6.19% and saving that extra money away safely, in case your very low rate was to track higher.
J_B.

TotallyBroke

I agree take the tracker and either overpay or save. In a couple of years time if things start to go up drastically then consider fixing for stability.

But I must say this is only my opinion and I know nothing really about mortgages. I was just lucky that I chose trackers from the off when buying. (didn't understand capped or fixed and would never have remembered to shop around when the deals ran out).

opinions4u

Joe_Bloggs wrote: »

As a complete ignoramus, that lifetime tracker looks good. You can hedge your bets by pretending you are on 6.19% and saving that extra money away safely, in case your very low rate was to track higher.
J_B.

Superb suggestion.

Pile the difference in to Regular Saver type accounts (6% Barclays for etc) and be disciplined enough not to use the capital unless your mortgage rate exceeds 6.19%.

Then you can use it to either (a) reduce the capital owing on the mortgage or (b) to subsidise monthly payments until rates hopefully fall again.

straddie

luckyfool wrote: »

Well, I agree with your rationale about fixing now (or in next 6-12 months) for the medium or longer term, however given that you can get a 10 yr fixed from C&G at 4.99%, I fail to see why taking one at 6.19% from First Direct makes any sense.

It certainly wouldn't make sense if we had the 60% LTV the C&G deal requires. As we don't, that's not an option, hence my uncertainty - we currently have a long term fixed deal available to us that we might not be able to get again any time soon. I'm not aware of any long term fixed deals any better than the FD one at the moment that we would be eligible for, certainly not with all the benefits of FD (online, offset etc). I'm happy to stand corrected though!

straddie

Thanks for the comments so far guys. It's good to hear others thinking the same thing as you, acts as a useful sanity check!

RainMaker_2

straddie wrote: »

I know nobody is equipped with a crystal ball but...

Therein lies the problem !

I think it's safe to assume the BOE will cut another 1%. If not in one go come January, then 0.5% Jan, followed by another 0.5% in February. After that who knows ? Using this assumption, on a £ 100k interest only mortgage you'd be saving £ 4.4k a year in interest Vs the fixed rate. Even if rates then rose by (say) 2% (what chance ?) you'd still be quids in.

The thing to remember is that interest rates will only start to rise when the economy starts to expand again. That means rising house prices, falling unemployment, which will mean banks relaxing house lending criteria, and competing meaningfully for business. So fixed rates will become more competitive, even when rates start to rise for the above reasons.

If it was me I'd thank my lucky stars to to be on a +0.79% tracker and I'd be staying put for quite some time. Just my thoughts...