90% mortgage with HSBC - Fix, tracker or discount?

sheddy7

Hi all, looking for a bit of advice as to which type of mortgage to get.

My girlfriend and I have had an offer accepted on a flat for £173k and an AIP with HSBC based on a 10% deposit giving a mortgage amount of £155,700. We can afford a little bit more than 10% dep but not as much as 15%.

The mortgage types HSBC have for our situation are 2 year Fix at 5.99%, Lifetime Tracker at 4.09% above BR (4.59%) or 2 year Discount at 3.89%.

At first I was more leaning towards the Fix for the peace of mind but after working out the figures I'm thinking this could potentially give us a big problem in 2 years.

Monthly payment: £1002 - £777 interest = 225 * 24 months = £5400 paid off.

We wouldn't be able to afford to overpay so when the fix is up we would have only paid off £5400, meaning we will still be looking at 90% LTV deals but also unable to use any FTB offers.

The discount rate could work out quite nicely as we can overpay that to the max allowed (no more than 20%) and still have lower monthly payments than the fix.

Monthly payment: £972 - £505 interest = 467 * 24 months = £11,208 paid off.

This would also mean that in 2 years we could potentially pay off £11,208 and be able to switch to a 85% LTV deal. Of course, the problem is how much interest rates may rise and switching this mortgage within the first two years would incur a redemption fee.

Then we have the Tracker rate which has the advantage of unlimited overpayments and no penalty for switching. If we paid the same monthly amount as for the fix:

Monthly payment: £1002 - £596 interest = 406 * 24 months = £9,744 paid off.

So £9,744 paid off and also enough, in theory, to move to an 85% deal. This would seem to me to make the tracker the best option as it still gives the flexibility to move to a better deal at any time, should interest rates shoot up.

Does this all seem reasonable or am I missing something? (I know I'm not considering whether the property will be worth more or less in 2 years, but that would be complete guesswork anyway)

dimbo61

your figures all depend on the BOE base rate staying at 0.5% for the next 2 years.
Now the BOE rate was 5.5% in october 2008 so the tracker deal would be 9.59% IF the rate went back up to that level and the mortgage payments would really hurt every month.
lots of people would also be in serious problems BUT please be aware.
No chance of a 5 year long term fix for security over the next few years?
.

sheddy7

Yes, they do but it's impossible to tell when they'll go up and by how much so it's difficult to know what to work with. There was that news story recently about how 'experts' believe interest rates will be staying low for a while and only increasing gradually which is what made me consider the Tracker and Discount option in the first place.

However, thanks for mentioning the 5 year fix, I had forgotten that as an option. It's 5 years at 6.49% which actually works out at £50 more per month which is not too bad.
This means by the end of the term we would have paid

Monthly payment: £1050 - £842 interest = 208 * 60 months = £12480 paid off.

and that's if we don't make any overpayments. So would the 5 year fix make more sense do you think?

I guess the problem with the Tracker is although we can switch to a better deal in theory there may not be one available, especially if we are still not up to 85% LTV level and would no longer be able to get any FTB deals.

Spangled

Personally speaking, I really don't see the value in a two-year fix. For me, in the current economic climate, it offers the worst of both worlds as when the fix ends, we're almost certain to have a higher BoE base rate than we have now - so you'll be looking at rates that are considerably more now plus will be faced with another set of arrangement fees (unless you go to SVR). And you might even have a higher LTV, depending on how house prices go. If I was fixing now, I'd go for five years as a minimum, maybe even seven or ten (depending on your future moving plans).

As far as the tracker goes, a rate of BoE + 4.09% is a heck of a differential. I'm fortunate to be on a lifetime tracker of BoE BR + 0.99% and I think even *that* rate is a high margin (compared to lucky friends who are on BoE BR +0.23% deals). As Dimbo says, if rates go up even just one percentage point, you're immediately looking at a pay rate of around 6%, if not more.

That all said, I don't have any easy answers. Being a FTB with a 10% deposit doesn't put you in a very strong position these days. If spare cash is as tight as you imply in paragraph two, I'd be after a fix of at least five years.

Good luck!

sheddy7

Thanks Spangled, what you say about the 2 year fix is pretty much my thoughts too, I think it just looked like such a good deal as the interest rate was a good deal lower than other offers for FTB with 10% dep. However, I think you are both right in that a 5 year fix for an extra 0.5% point is a much better deal.

Thanks chaps, I reckon we'll try for that.

TrickyDicky

We've just gone with the HSBC tracker, but mainly cos of the overpayments. We can afford about £300 extra per month and we dont recon the BOE rate is going to climb very fast. Because you'd be saving about 30% per month at the beginning with the tracker over the fixed, the BOE base rate would have to climb over 2 percent in 2 years for you to have been better off with the fixed (yes, this is possible). Even better if you can afford to pay into the tracker what you would have been paying for the fixed.

On our reconing, for us (not nec. for you), because we will be overpaying and not reconing the BOE will climb too much, by the time the BOE has climbed a couple %, we should have a much better LTV in the house, hopefully then we can remortgage on a better deal. We can also afford the BOE base rate climbing by 5%.

danm

you need to check, but i'm pretty sure the BR tracker has no tie in, so theoretically you could move the loan should rates spike and there be more attractive deals in the market. Would obvioulsy cost you fees etc.

fwiw - i'd go with the tracker.

dimbo61

Put £5 on the lottery or the horses not gamble with your home!!!
Security for the next 5 years and the chance to overpay upto 20% each year IF you could afford it.
Now this also means 5 years of pay rises and it will get easier each year and if you can overpay even by a couple of £100,s each month you could have a LTV of 75% or even 60% when you come to remortgage and not worry about the mortgage rate for the next 4/5 years.
The decision is up to you
Consider what your plans are for the next few years
Planning a family?? Moving from this first time starter home , big pay rises due as you move up the ladder at work ETC everyone is different.
See a whole of market mortgage adviser if neccessary!