Tracker or 10 year fix?

pinkteapot

Agonising over this decision.

Looking at a BoE base rate tracker, current rate 2.49%, or a ten year fix at 3.89%.

Repayments with the tracker £1,100 vs £1,278 with the fix.

Booking fee is £1k higher for the fix.

Part of me says tracker because for the first couple of years that's another £178 per month we can overpay by (plus the £1k up front).

But, if we take the fix and base rates stay at 0.5% for ten years (I know it won't happen but bear with me), we'll have 'wasted' £22,360. That's the maximum possible downside.

If we take the tracker the maximum downside is unknown, and could potentially be much higher if the base rate rises significantly. It'll only take three 50bps hikes for the rate to be the same (within 0.1%) as the fix, and beyond that obviously more. I know the first increase is very likely in the next few years, but I'm not sure how quickly they'll go up beyond that.

We're only borrowing 52% LTV and the tracker has unlimited overpayments and no ERC, so we could take that, get down to under 50% LTV, then fix. But of course by that time fixed rates will probably be higher.

I know it's our decision, and it depends on our risk attitude, etc, but are there any other financial ways of looking at it that we should consider?

dimbo61

So HSBC tracker and YBS fix!
Back to crystal ball time again.
We fixed in 2005 for 5 years at 4.74% and watched in horror as BOE rate dropped to 0.5% in March 2009 and a Lucky Few enjoyed base rate plus 0.1% or 0.5%.
The deals they had were when the BOE base rate was 5.5% or 6.0% so I hope they did well.
With overpayments and the JAG/BMW/AUDI RS still in the showroom and not on my drive I still managed to reduce our huge mortgage debts and hope to be MF soon.
Long term planning.
No chance you might have to sell up and move in a few years?

pinkteapot

HSBC won't lend to us and our broker doesn't want to touch YBS, so no and no.

The chances of having to move are as low as they can be. We're intending it to be a long-term home, but if life throws a disaster in our path and we're forced to sell up then the 10 year fix does obviously have an ERC.

Kynthia

There is no right decision as much depends on your personal circumstances and much is trying to guess the future. The thing is it seems like you can afford a bit of risk, so why pay a premium to fix now for so long? I take it you can get a tracker with no tie in for a much lower rate than the 10 year fix. Then when long term fixes begin to rise, you can respond instantly and fix for as long as you like. The savings you'll make until then would probably be worth it.

Yorkie1

Have you looked at any of the switch and fix products? i.e. a tracker to start with but with the option to fix with the lender when you want. Don't know what the products are actually like though.

pinkteapot

Thanks all - after much dithering we've decided to stop being wimps (well, that was mainly me) and go with the tracker. Even my husband's very conservative father said tracker after looking at the numbers.

Lifetime tracker, current rate 2.49%. No tie-in and no limit on overpayments. The 10 year fix was 3.89% and would cost £178 more per month initially. So that's an extra £178 we'll be overpaying at the start (until rates start to move). Plus we're saving £1k on the product fee.

£245k mortgage over 25 years. Repayments starting at £1,100 on the tracker and to start with we'll be overpaying by around £800 per month (I'd like to get this up to £1,000 if I can squeeze our budget in other areas).

The only reason I was considering the fix is that we're planning on having kids which will obviously squeeze our income significantly, potentially in a few years when rates are just starting to go up. But if we bottle it later on we can move onto a fix. We're keeping a savings pot back for after the move, which is enough to top our income by £500/month for five years (or more per month for less time) in case things get tight.

I believe that with the particular tracker we're going for, overpayments reduce the monthly payment rather than the term. On our current mortgage we've done it the other way round, but will probably leave it on this default setting with the new one as our OPs in the first couple of years should reduce the repayment a bit for when things get tighter.

If worst comes to the worst, the house is in a really popular area near good schools so with the amount of equity we'll have we'll always be able to sell up, pretty much regardless of what happens in the market.

Fingers crossed! It is daunting as we're on a teeny tiny mortgage at the moment with loads of spare cash each month. But sometimes you just have to go for things.

nge101

I'm in a similar dilema, but I'm fairly convinced that base rates are going up next year. I'm looking to fix down for 5 years. HSBC are doing it for 2.99 and I've also found 2.88 with Barclays.

pinkteapot

We ruled out a five year fix as we'd come out of it onto SVR just when (hopefully) the baby induced slump in income hits. If I'm earning less at that point, we'll also have less optimal deals open to us. If we end up not having kids, we can comfortably afford our repayments up to a mortgage rate of about 10% so the tracker is no problem. If I end up pregnant and scared we might fix later on, which would be at a higher rate than today but we'd have overpaid on a low rate up until that point.

I'm convinced base rates are going up in the next couple of years, but slightly banking on them going up pretty slowly to start with.

Although now I say that I'm doubting myself again. Especially seeing the GDP number come out this morning. Stupid recovery.

dimbo61

To get a £245K mortgage you are not on the average income of £26K a year !
With an interest rate of 2.49% I would hope to get the same in ISA,s so fill 2 of them each year as well as overpaying.
Good luck in the dream house move :-)

pinkteapot

Thanks!

That's exactly what we've done to date - in each tax year, we first fill our ISAs and then spend the rest of the year overpaying the mortgage. The tax-man earns NOTHING on our spare cash.