How to compare fixed rate with tracker mortgages?

Miss_Penny_Pincher_2

I was hoping for some advice from the lovely mortgage advisors on here...

I was wondering how advisors compare fixed rate mortgages against tracker mortgages for customers. I'm trying to compare different rates as I'm prepared to take on a tracker mortgage but want to be able to calculate how many interest rate rises there would need to be for it to cost more than the fixed rate mortgages on offer.

For example taking a 2 year fixed rate of 6.18% (no arrangement fees) which would cost in total £14,865 over the 2 years and comparing this with a tracker rate of +0.28 over BOE base rate also with no arrangement fees comes to £14,600 assuming interest rates don't change.

So the tracker rate has leeway of £265 to allocate towards increasing interest rates before costing more than the fixed rate. What I was wondering is if there is anyway of working out how much the interest rate would need to increase by in those 2 years before it becomes more costly?

I'm pondering this as I can afford to take the risk of a tracker and if it allows for say 8 interest increases of 0.25 over 2 years then I would be happy to take it but if it was nearer 2 then I would probably go for the fixed rate.

Rick62

Just compare the interrest rates. So Fixed is guaranteed 6.18%. Tracker is initially 5.78% (5.5% plus 0.28%) which is lower by 0.4%.

So if rates go up 0.25% then the tracker is still 0.15% cheaper. If rates go up 2 quarter points then it will be 6.28% and so 0.1% more expensive. However, depending on the timing of the rises, you will probably still have saved overall. If rates go up 3 quarter points then you are paying 0.35% more on the tracker, and at that point it is not looking so good.

So if you think rates will not go up more than 0.5% then go for the tracker, if you think rates will rise by more than 0.75% then go for the Fixed.

If you are stretched you should also consider affordability, so if you know you can afford the Fixed rate then it gives you peace of mind that if rates really go high you are protected, so that has some value. Although if you are really concerned about increasing rates then 2 years is maybe too short, right now 5 and even 10 year rates are at similar rates to 2 year fixes.

JoeK_3

Why not consider a capped rate mortgage as well for comparison purposes. This way you have limited your upside and allowed rates to come down (if they do)

A good whole of market mortgage broker would be able to do all this for you.

JoeK

kingkano

Exactly. I think its better to look at fixed rates from an affordability aspect rather than thinking you can beat the system. I suspect banks rarely lose lol. But the appeal of a fixed rate is fixed payments which makes for easy budgeting etc.

I think fixed rates usually hover a couple quarters above trackers anyways. Now if you can get a negative tracker that would give a little more leeway (nationwide does them I believe).

Maybe a capped rate??

*EssEncE*

If your credit history is good, your income sufficient and your LTV less than 95%, you should be able to get a better 2 yr fixed rate than 6.19%.

Like pevious posters have said, speak to an IFA / Mortgage Broker who deals with 'whole of market' to maximise your options.

It is widely expected interest rates to rise by a further 0.25% over the next few months, then possibly another 0.25% before year end, therefore peaking at 6%. But the latter increase is not predicted by all lenders. I must stress, it's a guessing game with the possible rate increases.

Miss_Penny_Pincher_2

Thanks everybody for your comments.

Rick62 - that's a good suggestion - I just thought it must be more complicated to have a true comparison e.g. different factors to take into consideration such as when the interest rates change and that some providers take longer to adjust their rates after a change in the Bank of England base rate.

I will use this when comparing the two. I think a tracker rate is a potentially viable option for me as I'm currently on a 2 year fixed and am far from stretched and just wondering if as fixed rates are so popular now and I have read that mortgage providers do factor in the security aspects, making them potentially more expensive. I'm not able to explain this very well so I hope you can understand what I'm trying to say.

In terms of the term the absolute maximum I need is 5 years as (fingers crossed) I plan to pay it off in that time scale.

JoeK - I would happily consider capped rate mortgages but there don't seem to be many of these around these days? I will try to find a competitive one!

essence - true about the 6.19% - my mortgage amount will only be about £55k that I'm looking to borrow so a mortgage without an arrangement fee but with slightly higher interest rate works out cheaper than mortgages with arrangement fees. that interest rate I just took from what my current mortgage provider has on offer (nationwide) as using that as a starting point. Will shop around though and it's promising that there are better rates available