Fixed rate or Tracker in current (future?) economic environment

Mojo71

Hi,

I'm looking for some opinions and advice about what sort of mortgage to go for when my fixed rate deal ends in July.

Basically, mortgage will be 25K, and am looking at payments of about £250pm.

Two options I'm considering (both with Nationwide):
- either a 2 year fixed rate (currently about 5.8%)
- or their Lifetime Tracker mortgage (currently about 5.7%)

Now, if I go for the fixed rate, it has to be for 25K, as this is their minimum amount so that I don't have to pay any arrangement fees.

However, if I go for the second option, I'd be prepared to take it out for about 20K (since I have some capital available to put in to reduce it to this amount). Then, I'd probably reduce the term so that monthly payments still work out at about 250pm, the idea being that the capital repayment per month would be much higher than the interest being accrued.

My questions, however, are relating to unknown future events like interest rate changes or economic downturns. What usually happens in these scenarios? (i.e. what has happened in the past?)

If rates go up a bit to try and cool the market and inflation, it wouldn't really make much of an increase in the monthly payments (about £15 for a 1% increase).

But what makes interest rates spiral out of control? (e.g. to the 15% they were at the beginning of the 90's)

If there is a downturn (e.g. house prices crash, stock market crash etc.), do the rates quickly come down?

If there is a recession (perhaps ignited by problems in America), do rates usually come down to help stoke up the economy again?

And what happens in deflationary periods?

Basically, I don't really want to go Fixed Rate at 25K (since i'd paying interest on a larger amount) if I could go for the Tracker at the lower amount, as this would then save about 3-4K in interest over the next few years.

Anyone got a crystal ball?

ailuro2

We have just been in this situation and ended up going for a tracker because it allows us to overpay by as mcuh as we liked, where the fixed rates we looked at limited us to 10%.Our outstanding balance is less than 30k too:j

not sure if it is relevant to you. USe a mortgage calculator to work out how much a 1% increase would cost you. Not very much on 27K, it could save a lot in fees going for the cheap set up.

Make sure you read MArtin's remortgage guide too- although he does say under 30k there is not a lot to lose or gian because of the size of the figures.