Which would you choose?

suzmis84

Hi All,

I have had an offer accepted on a property and am now in the process of getting a mortgage in place. My LTV is 80% and I am torn between the two options below:

1) 2.49% + Base Rate tracker, no fees, free valuation, no exit fees or minimum lock-in period.

2) 3.79% 3-year fixed, £995 fee, £530 arrangement & administration fee.

Now I am nervous about rising interest rates, although am tempted by the tracker due to the low current rate and flexibility at anytime to jump ship onto a new fixed rate. However, I also like the idea of a fixed mortgage given it takes away the stress of rises in the base rate.

Question is what would you do in my position?? I don't expect much change in the base rate this year, and could move to a fixed rate later on, however by then fixed rates may be considerably higher?

Please help.....

holly_hobby

You have really already answered your own question.

BOE base will not go any lower - how long it says at 0.5% is anyones guess (i don't belive it will rise by the end of the year based on current economic conditions - but then again the BOE are coming under pressure re rising inflation above their target).

The tracker is attractive because of the lack of fees or tie ins - and if you have a reasonable attitude to rises, and have the budget to absorb any rises then the tracker may well be for you.

You have already realised that if BOE base (and thereby LIBOR rate at which banks inter lend) rise - then so will fixed rates. (as it will be costing the banks more to purchase the tranch of funds reqd).

As it is at the moment, fixed rates that are available now are the lowest they are going to be ... as the cost of borrowing can only go up (as I can't see us ending up like Japan did with 0% base !).

A wise borrower may fix now at a medium to long term deal (5 yrs +) - and be happy to absorb the product fees, knowing exactly what the mge payment will be each month over the fixed term ( and probably over the long term saving £ when the BOE base & mge rates start to creep up again).

But only you can decide which suits you ... others can only give guidance and opinion...

Hope this helps ( a little !!)

Holly

hcb42

THose fees would make feel ill, but then i hate paying fees...!

holly_hobby

hcb42 wrote: »

THose fees would make feel ill, but then i hate paying fees...!

I know pretty steep aren't they .. and if you add them to the loan the equiv total admin cost over the term would really make your eyes water ...:eek:!!

Holly

Procrastinator333

How much are you borrowing? I would suggest converting the fees in to the equivalent interest rate. E.g. It may work out, that over the 3 years, the £1,525 of fees is the equivalent of 0.4% per year. Imo that just makes the comparison a bit easier.

Imo, if you can afford rates shooting up, you should take the tracker. Fixed mortgages are a form of insurance. As with all insurance, the seller will make a profit in the long run.

VT82

holly_hobby wrote: »

As it is at the moment, fixed rates that are available now are the lowest they are going to be ... as the cost of borrowing can only go up.

That's obviously not the whole story. The reason they are so cheap now is because rates certainly won't go up for a while, so there is a guaranteed period where you are better off not taking the fix.

As has been said, the size of the loan is all-important in this case. Use Procrastinator's method to recalculate what the fix would really cost you once fees are amortised over the fixed rate period. And remember that if rates HAVE shot up in three years, the pain on refinancing will feel so much greater coming off a cheap fix.

Best thing to do could be to take the tracker, and overpay as if you were paying 3.79% (or 4% or 5%). If the lender won't allow you to build up a credit in case you want to pay less than your mortgage payment once BBR+2.49% is above your 'fixed' payment, then you should save the overpayment in a savings account instead of overpaying.

With the term tracker, you might never need to remortgage, and hence pay arrangement fees and exit fees. And you therefore won't need to worry about your LTV getting worse from a drop in property prices. You will never end up on the SVR, which can be managed upwards even when base rate isn't rising.

After a while, your mortgage will be smaller, and your house value might have increased, so once your LTV has dropped further, you can take out a cheaper term tracker.

But as mentioned, it largely depends on the loan size.

holly_hobby

VT82 wrote: »

That's obviously not the whole story. The reason they are so cheap now is because rates certainly won't go up for a while, so there is a guaranteed period where you are better off not taking the fix.

I'm not sure "what's not the whole story" as interest rates realistically can only really only go one way from here ... up.

However, I am glad that there is someone on here who has the insider knowledge, that it is cast iron guaranteed that BOE have no intention of raising base for "a while" (affecting money markets) ... I suspect that we have till the end of the yr as we are, but after that there may be some movement to deal with inflation issues. But even with over 20 yrs exp in FS - even I can't say with certainty what wil happen.

As stated earlier, no one can predict with certainty what will happen with future interest rates, and choosing a fixed over any variable mge product will be based on your available budget (and ability to absorb future increases), together with you desire/requirement for payment security and future budget planning over immediate financial savings but then I've already said all in this in my first post.


Holly

VT82

holly_hobby wrote: »

I'm not sure "what's not the whole story" as interest rates realistically can only really only go one way from here ... up.

That's obviously not the only consideration.

Let's say a year ago someone had the choice of 3.89% fixed for 5 years, or BBR + 1.89% for term.

Since then, fixed rates have gone up. But they would have still been better off by not taking out the 'record low, rates can only go up' fix, but being on 2.39% for a year and now taking out a higher 3.99% fixed for 4 years.

The same story is true now for any fixed v tracker decision - you will start off with the tracker being cheaper for a while. Nothing more sinister or 'insider knowledge' in what I was saying than that.

holly_hobby

Yes but that knowledge is all AFTER the event ... !!

Its common sense about the tracker (currently) being cheaper .. I've already stated that.

The OP is looking for someone to tell them what to take - and its not as easy as that - and no one can guarantee that rates will stay as low as they are for the foreseeable - as you promised the OP they would do in your earlier post.

Tracker - take a punt (I am on a tracker myself) .. but be aware that your monthly payments - may increase during the product term - great if you can easily absorb a rise in costs, and it is felt that the saving in admin fees over the fixed, will further offset any increases. Further to which, when the rates do start rising so will any fixed rate products the lender has on offer for a product transfer - and the rise could be significant to what they are now - but may only be negligible - no one will know for sure until that time.

But if budget and stability is an issue .. then fixed or (the sadly lamented) capped product is more suitable to the individuals needs.

Anyway, best of luck to the OP.

Hollly

lightspeed

ask the question....are your just "nervous" about rising rates OR can you "not afford" rates to rise?

If its the latter then take a fix. Chances are that it will cost you more in the short term but you are paying for the security of knowing your monthly payments.

If its just the normal anxiety, then join the club and consider the tracker.

hillcats

we have been on tracker mortgage rates for the last 8-9 years. (7% ish tops) The existing product we have (detailed below) will see us to completion, that I'm sure..