MSE News: Is it time to fix your mortgage?

Dan_1976

Your getting off topic ladies!

Gorgeous_George

Chrismaths wrote: »

It seems the gist of the article is tracker=cheaper, fix=peace of mind, but that's a gross oversimplification. So here's a more complex view from an investment manager (not a mortgage guy).

Firstly, if you are on a tracker or SVR, you need to work out the margin you are paying over base rate - simple enough, just take 0.5% off what you are paying. This is the margin you are paying.

Now for 5 year fixes, to work out the margin you need to take a fee-free 5 year fix and subtract what's called the 'swap rate' (available here). Now a cursory google suggests that you are likely to be paying about 5.5% on a 5y fix at the moment (a lot more if you don't have 25% equity). The swap rate is about 3.05, so current fixes are on a margin of a shade under 2.5%.

So if the margin on your current loan is less than 2.5%, (so the rate is less than 3%, you will be increasing the profits of your bank, and perhaps doing your patriotic duty by taking the burden of the rest of us taxpayers

However this still leaves the problem that some people who have a cheap tracker require insurance against interest rates rising too far - so what they really need is something that does this without them needing to remortgage and lock themselves into an expensive new mortgage.

The first thing that springs to mind is an interest rate cap (which pays any interest payments you have over a fixed level) - which it is possible to purchase separate from your mortgage. However I'm not sure of anyone who arranges these for retail clients. Another quick google yielded this but I've no idea if they are reputable or how expensive they are.

But it seems a much better way of getting that insurance without changing your mortgage - this could be especially important to people who don't have 25% equity but do have a cheap tracker mortgage. Interest rates on a 5 year fix at 90% LTV are over 7.25% WITH a whacking fee - that's would take some ridiculous level of interest rate rises before you were likely to break even.

Just a thought anyway.

But the margin that the lender 'makes' is not the mortgage rate minus 0.5% and I'm sure that is not what you meant. The lender takes funds from many source including savers and through the markets at LIBOR. Then they need to factor in risk and costs making the margin much, much lower than mortgage rate minus 0.5%.

It needs to be easier for people to chose and it is. If you can afford to be wrong, choose the product that you think is cheaper over the term of the product. If you cannot afford to gamble, choose a fixed rate but accept that this will cost more.

It's like home insurance. If you can afford to replace everything, you could save £150 or so per year by not bothering with contents insurance. After 20 years without a claim (like me) you could be £3,000 up. But I buy insurance.

GG

VIGILANT22

[QUOTE=Gorgeous George

No salesmen selling beer?....:)

wymondham

getmore4less wrote: »

Only those that decided to spend the money

Those that carried on paying as if they were at a higher rate have reduced their exposure by having a much smaller mortgages.

True, but how many people out there 'in the real world' do this? I bet most people don't even know you can overpay.

Dan_1976

In the real world, most people worry about the day mortgage rates and payment go up.

Most people who brought in the last 3-5 years, did so at the top end of their budget, meaning they cant afford payments to rise.

This is why as soon as rates start to creep up, and they will, the general public will go fixed mad. Like when the crunch hit, all the self certed fixed of 5% came out on to 6% or worse they were stuffed.

On here, most people are savvy and have a plan, MSE does not reflect a high % of the general public.

Jonbvn

poppy10 wrote: »

It's worrying the number of people who have simply moved on to the SVR or other trackers rather than tying in a fixed rate. While they might be enjoying the record-low payments now, with inflation surging it is only a matter of time before interest rates start to rise, and once they do they will shoot up very quickly. People that have been used to paying 2% interest will find it very hard to adjust to a trebling of their monthly interest payments when rates return to the long-term average of 6%

I think you are overstating the chance of a possible early rise in IR's. Big Bad Ben at the Fed reckons that US IR's will be low for a looong time, and Rog The Boot at Capital Economics is of a similar mind wrt UK rates.

stueyhants

Jonbvn wrote: »

I think you are overstating the chance of a possible early rise in IR's. Big Bad Ben at the Fed reckons that US IR's will be low for a looong time, and Rog The Boot at Capital Economics is of a similar mind wrt UK rates.

Agree 100%. Inflation is going to be painful over the next 18 months but the BoE are stating it's a spike due to one off factors and therefore do not need to raise rates to control it. There are also a number of other tools the BoE can use to reign in the market if it's starting to get overheated such as removal of QE and the government can increase taxes to slow the economy down (if it's needed). IMO QE will be removed before IR go up and so that should act as a forewarning to fix your rates before the masses start to panic and try and fix at the same time.

Dan_1976

Good points stuey. I think for mr average the next year will put pressue on the purse! But I dont think we are now heading up and not down, just a tough road on the way.

[Deleted User]

The issue here is that you're comparing apples with oranges.

For many people - at least this is what I've found when researching our own mortgage - the rates available on trackers are pretty much the same as those on fixed. So, starting from what I hope is a fairly reasonable assumption that 'the only way is up' for the base rate, what option would you rather:

A rate of X% that is fixed for 5 years; or
The same rate with the potential to increase?

Take Santander for Example. The best rate we can find for our LTV is 5.99% on a 4 year fixed. But the equivalent tracker for our situation tracks 4.99% above the base rate, so is starting on 5.49%. It only needs to increase by 0.5% in the next 4 years for it to be the same as the fixed.

Of course, there are lots of assumptions in there, but I just don't see any decent tracker rates unless you have quite a hefty deposit (in which case I think there may be a case for sticking with trackers). For lowly 85% + people like us, fixed makes sense.

Gorgeous_George

Santander currently offer:

5 year fix at 4.99% (£995 arrangement fee, 85% LTV)

or

Tracker at BofE +3.94% - currently 4.44% (Same fees and LTV)

Given the choice, I'd choose the fix IF I NEEDED a NEW mortgage.

For remortgaging, I would need to compare this 5 year fix with the option of doing nothing. For many people, doing nothing is the better option - especially if the rate that their mortgage has reverted to is linked to BofE BR.

Lenders are keen to entice you away from your old product because they are being hurt by their former lack of foresight.

Watch out for them adding the arrangement fee to the loan amount to make it seem more attractive.

GG