Should we switch and fix?

pencildrawing

I'd be really grateful for any opinions on this, I can't decide which is our best option.

We're with Nationwide on a 1.24% tracker, but we have the 2% collar, so we're currently paying 3.24%. There's a year left to go and then we revert to the Base Mortgage Rate which is guaranteed to never be more than 2% above the bank base rate (so effectively, we'll move from a 1.24% tracker to a 2% one).

We have the option to move to a fixed rate with no redemption penalties or product reservation fee. We're being offered a five-year fix at 4.39% with a £1k fee (added to the mortgage) or 4.69% with no fee. Our mortgage is about £104k, so these work out at £60 and £80 more per month respectively.

I really would like to be on a fixed rate, but by switching to a new product we will lose both the guaranteed BMR (this is why I want a five-year fix, in the hope that by the time the deal comes to an end, being at the mercy of the variable rate won't be such a worry) and also the ability to take payment holidays. This last isn't something we would want to do, but it's nice to have the option in case things don't go as planned.

Any advice is much appreciated!

getmore4less

We're with Nationwide on a 1.24% tracker, but we have the 2% collar, so we're currently paying 3.24%. There's a year left to go and then we revert to the Base Mortgage Rate which is guaranteed to never be more than 2% above the bank base rate (so effectively, we'll move from a 1.24% tracker to a 2% one).

Do you also lose the collar when the time is up?

Whats the max you can afford?

I would be tempted to stick with what you have and overpay/save as if you had fixed.

pencildrawing

Yes, the collar goes, so if the deal ended now, we'd actually be better off. But it's not up for another year, so the base rate may be over 2% by the time it becomes an issue anyway.

I think we'd be OK if the base rate didn't go above 6% (so we'd be paying 8% max) but that would really stretch us and assumes that living costs stay the same which I'll bet they won't.

I don't know if it's really worth overpaying on the mortgage - we have a couple of unsecured debts which we're throwing all our spare money at, and our LTV is 67% so we're already getting the best fixed rates available. The mortgage has 18 years left to run, so paying it off early is going to be a long-term goal; at the moment I'm more focused on being able to afford the monthly payments if rates start to go up quickly, which is why being able to take payment holidays is quite an attractive feature of the deal we have now.

If we did fix now it would be a gamble against the base rate being nearer to 3% by this time next year, and house prices staying stable so that our LTV stays good. Both options have benefits to us, and I'm very glad to have options, but I can't decide what to do for the best. If we fix now and rates don't go up quickly, we'll end up paying Nationwide £700-£1000 in unnecessary interest over the next year, but if we don't fix and they do rise fast, we may not get such a good deal as this.

dimbo61

paying £1000 as a fee and then another £1000 extra over the next year in interest if rates dont rise when you could use that money to overpay and reduce your debt is your decision
Take a long term view and see how much you would owe at the end of the 5 year fix ( whatsthecost) and what would your LTV be then

getmore4less

OK with other debts that changes the picture.

Without more information on those it is difficult to look at the options.
How big are the debts and current rates, payments and terms?

Looking at the £104k mortgage over 18 year term and the offers where you would be at end of 5 years

1 : base(2%Col)+1.24% 3.24%, 1 year (£636.08pm)
base+2% tracker

or 5 year fixes

2. 4.39% £1k fee (£704.05pm)
3. 4.69% £0 fee. (£713.86pm)

Ok doing the trackers like for like paying £714pm over 5 year
2. £105k @ 4.39% 5 years £82,912.19
3. £104k @ 4.69% 5 years £83,250.45
So worth paying the fee if you fixed.(breakeven is dec 2014)

Now if you stay on the tracker(paying £714) and rates did not go up.

1a. £104k @3.24% 1year £98,723.70
1b. £98,723.70 @2.5% 4year £73,090.43

So over the 5 years you could save upto around £10k for the same investment.

That's based on the mortgage rates factoring in the other debt will change this.

I think you need to rethink your reasoning that 3% is a target base rate
by taking the fix you are taking the gamble that base rates will go over 4%.

the longer they stay below 4% the higher they need to go to be worse off in 5 years time.

Lets say they stay low for 1 year you will them owe £98,723.70
over the next 4 years, to be no worse off than the fixed, the rate would have to stay below 5.06 so base of 4.5%

Depending on the other debts there may be other options that make good use of the money currently available across all debt.

OH and this does not factor in losing the BMR of base+2% which may or may not look verattractiv in 5 years when the fixes will have you on the other higher followon.