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Category: Mortgages Date: 4/19/2011
In the present economic climate is it best to re-mortgage to a tracker or a fixed rate mortgage?
Edwina, Surrey.
The Bank of England has maintained base rate at its all-time low of 0.5% since March 2009 – a massive 25 months. Those mortgage holders who are on variable or tracker rate mortgages have really felt the benefit, but as time goes on, people are getting more nervous of a base rate rise, meaning a steady stream of borrowers opting for a higher, but more secure fixed rate mortgage – but which is best?
The Bank of England base rate is of massive importance to your mortgage payment if you're on a variable rate mortgage. When it's low – as now – it means cheaper monthly payments; but when it goes up, so will your mortgage rate.
Tracker rate mortgages follow movements in the Bank of England base rate, so lenders will "pass on" base rate changes in full to you. But how much would this affect your payment? Many forecasters are predicting the base rate to move slowly at first, possibly an increase of 0.25% to 0.75%, and then slowly building to 2.00% within a year – a 1.50% rise on current levels.
You can look at how increases in base rate could affect your payments by using our quick repayment calculator.
Let's look at an example of how base rate increases might affect your monthly repayments (based on a mortgage of £150,000 tracking 2.50% above base rate). These figures are based on an interest only mortgage.
The problem is that it's not clear when base rate will go up. With predictions changing constantly, and the uncertainty of economic growth and inflation all serving to muddy the water further, it could be next month (unlikely but possible), it could be later this year, or it could even be next year.
Fixed rates can be fantastic – they provide you with certain knowledge of what you'll be paying over a set period, anything form one year to ten years, sometimes even longer.
The problem is that if rates fall during your fixed rate period, you can be left with a much higher mortgage payment than those who are on a variable rate.
On the flipside, if rates shoot up 5.00%, it won't affect your payment until the fixed rate period ends. And if you've fixed for long enough, you could end up saving thousands of pounds in interest than if you'd gone for a tracker.
The answer to this question doesn't lie just in a discussion of the relative merits and downsides of fixed and tracker rate mortgages. It really lies in your circumstances, and which risk bothers you more.
Now if you're on a really tight budget, and can't really afford a higher payment – it's pretty obvious that a fixed rate would be the far safer option. Yes, you will most likely be paying more than the best tracker rates on offer; however, you're paying for security – the knowledge that (so long as your income remains the same) you have a mortgage payment you can afford for a few years – even if rates go up.
It's always good to take a long, hard look at your budget and see how much leeway you actually have – can you afford to take the risk of paying an extra £250 per month on your mortgage? If you can't, is it really a risk you want to take?
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