Fixed rate or Tracker Mortgage

sophievenusdoom

Everyone has a different opinion on when the rates might start to rise again...I would say it would be a safe bet that they won't spike for at least another 12 months. I must reiterate, just my opinion though :-D

dimbo61

The BOE base rate has now been low 0.5% for 18 months and during that time alot of people have taken out new mortgages or remortgages and if rates did go up to 5/6/7% it would really hurt and badly effect the fragile housing market.

getmore4less

With such a low tracker you find the best fixed fixed deals and pretend you are on those, save(you can get better rates than the mortgage) the monthly difference and fees.

If rates start to go up you just track the payments up and when the exceed the rate you could have fixed at you start to eat into your savings pot.

You keep reviewing for better deals

When you hit the term of the pretend fix you could have taken you then start to use that follow on rate which will probably be higher than what you are on.

Run some what ifs and the chances of loosing out are quite low risk in my view.

Gorgeous_George

It is better not to overpay such a low rate mortgage. Instead, put the would-be overpayments into a regular saver and you get more than three times the benefit of simply overpaying.

I always wanted to be mortgage free but with my 1.24% mortgage rate, I prefer to save at 5% (First Direct regular saver pays 5% i.e., 4% after tax), lend a little at Zopa (6.3%+ i.e., 5.1%+ after tax) and use cash ISAs (3.5% to 4% tax free).

And my mortgage falls by £500 per month with the normal repayments.

GG

jamesd

tmarzi wrote: »

My fixed term 4.44% mortgage deal is coming to an end in december 2010 after which it goes into a 0.75% tracker rate for the lenght of the mortgage life term.

Now, I know that the BoE cant keep the base rate at 0.5% for ever so I was wondering what the chances of it going up drastically i.e. from 0.5% up to say 4% within 2011?

It doesn't seem likely that rates will rise substantially during 2011. That's not going to happen until there's a clear indication that the economic recovery is well in place and the cuts next year will decrease economic growth, contributing to the need for rates to remain low.

What you can usefully do is identify the fixed rate that you'd want to use and find out the monthly payment for that deal. Then put the difference between that rate and your tracker rate into a savings account. At the end of the fixed rate term, check the balance in the savings account. If there's still money in it you were better off not using a fixed rate deal. if there isn't then you'd have done better with the fix.

You can continue to do this in the future to accumulate a buffer for temporary unusually high interest rates that sometimes affect trackers. An 8% rate for six months or even 12% for a month or two isn't going to hurt much when you already have the money set aside for it.

Long term studies have shown that those on trackers usually pay less in total than those on fixed rate deals. That makes sense because mortgage lenders have to pay more money to get the fixed rate money that they offer to borrowers. The challenge for the borrower is accumulating the money to cover the higher interest rate times.

Thrugelmir

jamesd wrote: »

Long term studies have shown that those on trackers usually pay less in total than those on fixed rate deals. That makes sense because mortgage lenders have to pay more money to get the fixed rate money that they offer to borrowers. The challenge for the borrower is accumulating the money to cover the higher interest rate times.

We are never going to see trackers with a lifetime sub 2% rate every again. By losing the rate the OP has, they'll never obtain this rate again. What gets overlooked with fixed term products is the fees. Over 25 years paying fees every 2/3/5 years adds up.

Best advice is to overpay (save) and make the most of this once in a lifetime opportunity. These are not normal times and won't last forever. So make the most of the situtation while you can.

jamesd

Well, I hope we never seem them again, given what it takes to get to rates these low. Did help me to get the money to buy the flat I'm buying for cash if I'd wanted to, so I can't complain about the stock market gyrations.

Gorgeous_George

Thrugelmir wrote: »

We are never going to see trackers with a lifetime sub 2% rate ever again...

We don't know that. 'Never' is a long time.

GG

jennfercain

Gorgeous_George wrote: »

It is better not to overpay such a low rate mortgage. Instead, put the would-be overpayments into a regular saver and you get more than three times the benefit of simply overpaying.

I always wanted to be mortgage free but with my 1.24% mortgage rate, I prefer to save at 5% (First Direct regular saver pays 5% i.e., 4% after tax), lend a little at Zopa (6.3%+ i.e., 5.1%+ after tax) and use cash ISAs (3.5% to 4% tax free).

And my mortgage falls by £500 per month with the normal repayments.

GG

I am on a 2.5% rate at the mo and overpaying like mad, its is knocking years off my mortgage and helped me to go from negative equity to decent equity.

Doesn't Martin always advocate that we over pay???

jamesd

jennfercain, not always. It's partly covered in Should I repay debts or save? That uses the difference in interest on the mortgage and in savings accounts as the decision factor. There's more detail at Should I pay off mortgage?

With a 2.5% mortgage rate it doesn't seem sensible to be paying off the mortgage because you can get 3.2% interest tax free in an easy access cash ISAs at the moment. Overpaying on the mortgage instead of doing that is just throwing interest money away: you're saving less in mortgage interest than you're losing in cash ISA interest.

It's even worse if you're willing to put capital at risk with investments, since the long term average return for the UK stock market is over 10% plus inflation. Or there are lower risk options like corporate bond funds that pay out tax free in a stocks and shares ISA (which isn't limited to just stocks and shares, there's a wide range of levels of up and down movement).

Pensions are also an option and the immediate tax relief on them gives those a head start on mortgage repayments. Add in the investment gains and it's easy for a pension to beat a mortgage overpayment.

These investment returns are why I could buy the flat I'm buying with cash, profit from investments, but I'm not, because I expect to make more money by having both a mortgage and investments than by having neither and owning the property outright. That'll help me to become financially independent of the state sooner (able to live on savings and investments for life) and hence have a more secure financial future.

Mortgage calculators tend to be very bad at comparisons like this. They usually show large reductions in mortgage interest paid but don't show you how much interest you're losing by doing it.