Choosing a fixed rate over a tracker - the great debate
Since the last market crash in 2008, the mortgage market has been heavily favouring fixed-rate products. This has been reflected in the products being offered by lenders.
Usually, in a stable market, most clients favour 2- and 5-year fixed-rate products, respectively. This very much depends on personal circumstances and can mostly be driven by monthly costs and early repayment fees. However, over the past few months, I have been having more and more conversations about tracker rate products. Usually, these were for clients who wanted to maintain flexibility with their mortgage for potentially moving house or making large capital repayments. Today, it is more cost-driven and current tracker rate products tend to be cheaper than fixed rates but hold a lot of risks.
For example, let us look at the cost. The below is based on a typical £250,000 mortgage, 75% loan to value, and full capital repayment over 25 years.
2-year fixed rate - 5.34% - £1515 per month
5-year fixed rate - 5.09% - £1479 per month
2-year tracker - 3.69% (0.69% above Bank of England base rate, currently 3%) - £1286 per month.
As you can see, for the same mortgage the tracker rate is £229 cheaper per month than the 2-year fixed rate.
The big issue to consider is the impact of interest rate fluctuations. As we continue to expect, the Bank of England base rate to rise it is somewhat inevitable that costs will increase in the short term, but at some stage, the rates will begin to fall. At this point, a tracker rate will benefit from these falling rates. Sadly, we do not know when rates will begin to fall.
The other benefit of a tracker rate mortgage is the ability to change at any point; so, if we do start to see rates increase again, we can simply research the best-fixed rate on the market. This is where having a good mortgage broker will pay dividends. Someone who has access to all of the information and can move at a moment’s notice. One thing to consider in this instance is the potential for higher fixed rates at that point.
As a broker, my role is to advise on the best product for my clients, and this is always on a case-by-case basis. One of the biggest concerns of tracker rate products is the risk of a fluctuating rate and the impact of this fluctuation on monthly costs. As a result, these products may not be suitable for everyone; however, they need to be considered for some clients.
One other consideration when advising on a lender and tracker rates is a product that follows the Bank of England base rate and does not follow the lender’s standard variable or is a discounted rate. This is due to standard variable rates being at the will of the lender and can vary much more than the Bank of England.