Fixed or Lifetime Tracker?

V6Matt

Hi All,

Just had an offer accepted on a flat and I wanted to pick everyones brains on mortgage types.

The property is £150k and I would be willing to put up to a 35% into the purchase.

I have narrowed this down to the following deals.

[STRIKE]
Fixed - 2 year fixed at 3.14% with ING (75% LTV)£155 valuation, £195 booking, £750 arrangement

[/STRIKE]
(Agreed that a 2 year fixed is too short term) 5 year fixed with £99 booking (65% LTV) at 3.89 or even a 5 year fixed with £1000 fees at (75% LTV) at 3.99 .

Lifetime Tracker - 1.89 plus base for life of mortgage (65% LTV), thus currently - 2.39% (First Direct), £99 booking fee, £160 valuation . Or same costs but 2.09 plus base for life of mortgage on an offset basis.




Now my logic is the following (please pick at it):-

I need a rise of 0.75% within that 2 year period before I encroach on the 3.14 rate of the fixed and in the meantime I am winning.

Then after this point, I could potentially lose out for the remainder of the 2 year period (that I would have had coverage with the fixed).

Now after this 2 year period I will be on a 1.89% + base, whilst the standard variable rate for ING at present is 3.5%, which is 3% above base!!

So in the long term I could greatly benefit if this 3% margin continues.

Now this is where it could potentially fall down, in good times what was the average GAP between a competitive variable rate and the BOE rate? I have searched high and low for actual/average historic variable rate over say a 5 year period, any ideas? As I could then compare this to the base rate.

In terms of affordability, I can take large amounts of interest rates increases financially (but would obviously prefer to mitigate/think through my risk!)

There is also the possibility of a 4% 5 year fixed, but again there is potential loss for a period of time and reverting to high variable rate after the period. There is always the option to remortgage, but have to consider whether the tracker + BOE rates will be more/less favourable then.

Any suggestions/ideas?

dimbo61

2 years on a fix will fly by and where will you be then ?
Why not think long term and go for an offset fixed for 5 years or longer if you plan on staying in the property.
The interest rate is important but the quicker you can repay the debt the less interest you pay

V6Matt

dimbo61 wrote: »

2 years on a fix will fly by and where will you be then ?
Why not think long term and go for an offset fixed for 5 years or longer if you plan on staying in the property.
The interest rate is important but the quicker you can repay the debt the less interest you pay

I had looked at an offset account, but my thoughts were that any benefit derived from the offset, i could counteract with interest on savings and the lower rate.

Do you have specific offset in mind? I also liked the flexibility in terms of overpayments with the fd tracker.

GMS

Stop using the words possibility and potentially.

Rates WILL rise, the only questions are when and by how much.

The deciding factor in this is your personal attitude to risk. If you are prepared to take a chance on rates rising within the period then go for the tracker. Make sure the Early Repayment period is not punitive.

Keep in mind as rates rise so will the fixed rates. Current fixed rates are low and are unlikely to be repeated in our lifetimes. Long term fixes may look unattractive now but in a few years could turn out to be the gamble of the century.

If you are worried about a tracker rising then opt for a fixed.

Nobody can predict the futuer, even the MPC are at odds as to what to do and they are the so called experts who set the rates!!

If a long term fixed is affordable then give it serious consideration regardless of the tracker competition as of today.

V6Matt

GMS wrote: »

Stop using the words possibility and potentially.

Rates WILL rise, the only questions are when and by how much.

The deciding factor in this is your personal attitude to risk. If you are prepared to take a chance on rates rising within the period then go for the tracker. Make sure the Early Repayment period is not punitive.

Keep in mind as rates rise so will the fixed rates. Current fixed rates are low and are unlikely to be repeated in our lifetimes. Long term fixes may look unattractive now but in a few years could turn out to be the gamble of the century.

If you are worried about a tracker rising then opt for a fixed.

Nobody can predict the futuer, even the MPC are at odds as to what to do and they are the so called experts who set the rates!!

If a long term fixed is affordable then give it serious consideration regardless of the tracker competition as of today.

Fair points and the rates absolutely will rise.

Being in the trade, do you have a view of how competitive a 1.89+base mortgage would have been in better times. i.e are they setting a higher tracker rate now to counteract the low BOE rate

GMS

Go back 3 years and trackers were +0.01 or even - 0.01.

Trackers are so far detached from where they were. The gap between fixed and trackers is narrowing and should be explored in my opinion.

slummymummyof3

Have you had a look at HSBC 5 year fixed rates? We took one out in Septermber (ish) and it was 3.94% for 5 years - we paid a £500 arrangement fee but it has since been reduced to £99 (sods law for us but hey ho!!)

getmore4less

V6Matt wrote: »

following deals.

Fixed - 2 year fixed at 3.14% with ING (75% LTV)£155 valuation, £195 booking, £750 arrangement

Lifetime Tracker - 1.89 plus base for life of mortgage (65% LTV), thus currently - 2.39% (First Direct), £99 booking fee, £160 valuation

With the lifetime tracker, you can choose to change to something better at any time, this will almost certainly only be another tracker, timing a fixed deal to actual save money is near on impossible(few get lucky) and whatever happens to base and the +% margins fix are going to be more than trackers till we get back to normal base rates so around the 5% mark.

With the fix unless the follow on rate is a good tracker or SVR(which it isn't) then you are in a situation where you are almost certainly going to need to change to get a better deal, new fixes and trackers etc will all reflect the base rates at that time so you could switch either. So another set of fees in 2 years.

So once you accept that the tracker will be the better followon 2 years then there is only the 2 years to think about. ( don't forget that you have the extra fees as well as the extra interest to think about)

So with a 2 year deal and say £800 more fees we can do a simple what if.

Say the base stays low for 1 year then rockets what rate can it go to before you area worse off(you can do other what ifs say 0.05% rise every 6months etc)

So lets do the numbers £97500(£150k*0.65) 20year term 2 year fix.

Fix (+800 extra fees)
£98300 @ 3.14% £524pm after 2 years £90,983.47

tracker (has to better this target with the same monthly payment)
£97500 @ 2.39% £524 after one year £93,498.61

To better the fix target of £90983 the rate can rise to 4.08% a rise of 1.69%

That is significantly more than the 0.75 it might first appear thats the power of overpayments and the cost of £800 extra fees.

Now no one knows when or how fast the rates will go up.

But as you say you don't need the fix for financial reasons so you are IMO always better off with the best variable rate going.

V6Matt

GMS wrote: »

Go back 3 years and trackers were +0.01 or even - 0.01.

Trackers are so far detached from where they were. The gap between fixed and trackers is narrowing and should be explored in my opinion.

Hmmm that's interesting, that sounds very low!

So there were rates of say :-

Lifetime tracker - 0.01 + base ?

and I was slightly afraid that trackers have been skewed upwards due to the very low BOE, which if historically high could mean when rates shoot up, I could be left in a position where I am paying above the odds.

getmore4less

GMS wrote: »

Go back 3 years and trackers were +0.01 or even - 0.01.

Trackers are so far detached from where they were. The gap between fixed and trackers is narrowing and should be explored in my opinion.

Go back further and the margins were higher Looking back to 2000 our variable rate
base our rate margin
5.75% 7.0% 1.25%

stayed between 1.0% -1.5% untill the derbyshire stopped passing on the full rate drops so margin increased to around 2% in 2004

We swapped to an offset tracker at base+0.95% Aug 2004.

I would say that the current margins are closer to the norm that the very low margins that we saw for a while were the abnormal.

V6Matt

slummymummyof3 wrote: »

Have you had a look at HSBC 5 year fixed rates? We took one out in Septermber (ish) and it was 3.94% for 5 years - we paid a £500 arrangement fee but it has since been reduced to £99 (sods law for us but hey ho!!)

I had spotted this on the First Direct page (linked with HSBC) and it was 3.89% plus the £99 fee.

Certainly looks interesting and probably looking more at this fixed than the 2 year now.