Lifetime tracker - isn't that the best way?

kurlakid

Hello,

I am a newbie to Mortgages and as a First time buyer in Aug 2009 with 80% LTV I think that I was illadvised to go with a 4 year fixed with Woolwich at 5.29% . Didn't know about this website then

Anyways in last 2 years I have manged to overpay and get the current LTV to 70% and was looking at what would be on offer if I wish to remortgage.

I read remortgaging advice by martin on this website and sort of understand all different types of mortages fairly now.

After looking at what the banks are currently offering,question came to my mind is that isn't Lifetime tracker the best way in comparison to both Fixed and SVR?

1. Fixed rate: The banks always take into account the anticipated BOE and/or LIBOR rate change over the fixed term they are offering. So there is rarely a chance that average tracker rate over that fixed term would have gone above the Fixed rate that was offerred. Banks surely can't be daft to offer a fixed rate that would turn out to be lower than the average tracker over that fixed term. I agree that fixed rate gives you stability for that period; but my point is that you would have had that stabilty anyways if you had gone with tracker because the banks have already taken into account the volatility in BOE/LIBOR rate while offerring their Fixed rate.

When I looked at BOE Base rate history since 1985, I can see that only time that annually averaged base rate (avearage over a year) went up by 5% was in 1987-90 period which was brutal; but other than that never ever has it gone up by more than 2% in succession even over consecutive 5 years period. And even if you look at this 5% rise in 1987-90, it followed up by slash of 10% in next 4 years. So still the person who stayed with a tracker from 1987 to 1994 would have by end of 1994 been better off than some one who tried to safeguard in 1990 paying a lot higher premium for Fixed rate.

So unless 1987-90 repeats you are safe to assume that the rate will not go up more than 2% in next 5 years. And even if does shoots up like in 1987-90 it might follow by a slash in next 4-5 years. So why to pay premiums to banks for fixing the rate.

ofcourse this is true if your finances allow you to accomodate a 5% rise in 3-4 years time. But if they don't and you protect yourself with fixed rate, at the end of the fixed rate you are facing a steep interest rate, then you are still in trouble so fixed rate does not necessarily protect you if you do not have finances to cover the rate rise in next 4-5 years unless you are expecting some other means of lump sum coming your way in next 4-5 years.

2. SVR: Never understood why one would go woth SVR instead of tracker. Lifetime trackers (e.g. HSBC) allows fee free overpayments/on off repayments etc. Again banks would never keep their SVR increament on average lower that average increaments to BOE rate over a year. So what's on offer for people who go with SVR instead of Tracker unless the bank offers cap on their SVR which they don't.

I am thinking of switching to a HSBC lifetime tracker at Base+1.99; but have a £4500 penalty to exit out of Woolwich. So as long as the Base rate does not cross 2% over next 24 months, I would be ok. By my analysis above it should be ok; but wanted your opinions. My outstanding loan is £145,000 and Property value is £215,000 estimated on London & Country website. So I assume 70%LTV.


Thanks
Sam

SandC

In times of high interest rates you may find that fixed rates are lower than the BOE rate.

For me, I am currently on SVR because my mortgage is very low and is not worth paying a fee to get on a tracker rate to save a % or so on payments. I am just going to sit and see what happens.

Personally I wouldn't do lifetime anything, it gives you zero flexibility. Are lifetime deals still applicable if you move?

Thrugelmir

The mortgage market has changed over the period you've analysed. Trackers are a fairly recent product addition.

Over time the wide discrepancy between what lenders are setting their product interest rates will narrow again. As each lenders balance sheet normalises. There's no longer the cut throat drive to win new business. Lenders can price the risk accordingly.

We are in unusual times. The only certainty being that the cost of borrowing will rise. How high in the future? That's the question everyone will be wondering.

All you can do is make a decision based on the circumstances at the time. To pay less interest pay down your debt quicker. Only lenders benefit from 25 year and over mortgage terms.

kurlakid

SandC wrote: »

Personally I wouldn't do lifetime anything, it gives you zero flexibility. Are lifetime deals still applicable if you move?

Actually you will find that the Lietime trackers ar ethe most flexible.
Unlimited overpayment with no fees, Unlimited lumpsum payments with no fees, no eraly repayment change, no exit charge too on HSBC's offer.

You can switch to Fix at any time. Ofcourse there will be arrangement fee for the new deal.

kurlakid

Thrugelmir wrote: »

The mortgage market has changed over the period you've analysed. Trackers are a fairly recent product addition.

I have analyzed BOE rate from Jan 1985 till Jan 2011.
I agree with your comment that the tracker is a recent addition (I did no know. I thought it was always there). BUt my comments about the rate hikes and slashes analyzed over period 1985 till 2011 are facts.

CloudCuckooLand

Tracker, Base +1.99% would have equalled nearly 7% at the start of 2009...5.29% is ok historically for payment stability.

Not sure what rates in 1987-1990 have got to do with rates in 2007-2011...the Base Rate was 5% in 2008, what is to guarantee it will not revert to 5% again? Maybe not for another couple of years, but assuming it would be 5 years is a big leap of intuition.

I guess what your analysis may be missing, is the fact that never, ever have rates fallen by 4% (-80%) within months before, so this is all an unknown. Not a known unknown, a proper unknown unknown.

Thrugelmir

kurlakid wrote: »

I have analyzed BOE rate from Jan 1985 till Jan 2011.
I agree with your comment that the tracker is a recent addition (I did no know. I thought it was always there). BUt my comments about the rate hikes and slashes analyzed over period 1985 till 2011 are facts.

Historically SVR's used to track base rate at around +2%. Competition kept rates in track. Those were the days when Building Societies lent a fair proportion of mortgage funds. Whereas now the new mortgage lending market is dominated by 5 banks and the NW.

So your 1.99% rate isn't far away from the old norm. The only difference being that HSBC can cherry pick their customers. If you fail there criteria then you may have to pay a far higher rate of interest.

We no longer have high wage inflation to erode the value of debt. So taking on a large mortgage now could remain so for a very long time.

kurlakid

CloudCuckooLand wrote: »

I guess what your analysis may be missing, is the fact that never, ever have rates fallen by 4% (-80%) within months before, so this is all an unknown. Not a known unknown, a proper unknown unknown.

Actually they did almost 4% twice from 1991 to 1992 and again from 1992 to 1993; but then you think that rates in that old period has nothing to do with current rates. So I can't convince you there.

This is like technical vs fundamental analysis of Stocks. Technicals believe that the price always takes into account fundamentals at that time.

But i fyou can accept the tchnical analysis then what happened after the 4% drop twice in the periods I mentioned above is that rates have never gone up by 2% in any 4-5 years time slot.

So 0.5 since early 2009, I am 100% sure that rates won't hit 2.5% until Mid 2013 (4 tyears period). And if BOE looses its mind to hike to to something like 5% by 2013, then they will be forced to bring it back down.

Anyways that's my opinion.

dimbo61

So you are going to pay £4500 in ERC,s and then the costs to move lender and HOPE that the BOE does not increase by 1.5% in the next 2 years to break even !!!!
Carry on with the overpayments and keep a close eye out on the follow on rate of your current deal !
Is it the SVR / BBBR of 3.49% or some form of tracker deal ?
So you will pay all the fees to move to a "better " deal which is 1% cheaper than the deal you would revert to at the end of the fix.

CloudCuckooLand

Knew I should have edited it for clarity...

Let me try again. Never, ever have rates fallen by -80%....the periods you refer to it was, from memory, around -25% and then -40% or thereabouts. Peanuts!

We have no idea if, how or when that 80% (which of course is +800% or so on the way up) will be "restored". Just because it look scarier on the way up, does not mean the BoE will not do what has to be done.

As often quoted in relation to Stocks etc, "past performance is not a reliable guide to future performance". Just because something happened one way in the past does not mean it will do so again, even if everything else was the same.

As many things are very different from the early 90s, it makes it even less likely than you can rely on the past.

There has appeared to be a "natural" (in quotes as its probably just an accident of 100 years of the industrialised age) balance, around the 5% mark, so if inflation is not to be an issue either we will enter recession (or near to) again, or rates will have to rise. In my opinion.

kurlakid

dimbo61 wrote: »

So you are going to pay £4500 in ERC,s and then the costs to move lender and HOPE that the BOE does not increase by 1.5% in the next 2 years to break even !!!!
Carry on with the overpayments and keep a close eye out on the follow on rate of your current deal !
Is it the SVR / BBBR of 3.49% or some form of tracker deal ?
So you will pay all the fees to move to a "better " deal which is 1% cheaper than the deal you would revert to at the end of the fix.

The follow on rate is Barclays Bank Base rate + 1.49

Actaully I don;t know what Barclays Bank Base rate means. Is it atracker or SVR or is it Barclays personal tracker?