Mortgages: To fix or not to fix?

Published:
09 December 2010
Topic:
News,Money,Mortgages

Deciding whether to fix your mortgage rate or plump for a variable deal has never been a tougher call...

Mortgage dilemma

On the one hand, fixing may seem the most sensible idea. The Bank of England base rate is at a historic low of 0.5% and, even though it has been at this level since March 2009, it will start rising at some point. Locking into a fixed rate now will therefore protect you from those increases.

What's more, fixed mortgages are really competitively priced at the moment. Yorkshire Building Society is offering a two-year deal priced at just 2.89% for reasonable fee of £495 in exchange for a 25% deposit.

If you'd prefer longer term security, you can fix your mortgage payments for five years at 3.99% from HSBC. This deal has an arrangement fee of £99, you'll need a big deposit, though, as it is only available for loans up to 40% of the property's value.

However, variable rate deals are also still tempting because the rates are lower than those on the best fixes and with interest rates having been unchanged for nearly two years, cheaper monthly repayments, in the short term at least, are an attractive option.

First Direct for example, is offering a two-year tracker priced at just 2.19% with a fee of just £99, although only those with a deposit of 40% or more will qualify. The leading lifetime tracker is from HSBC at 2.39%.

The arrangement fee on this deal is £99 and it is available for mortgages up to 60% of the property's value.

Obviously the key thing to remember about a variable rate deal is that, while your monthly payments may be lower now, they will go up when interest rates start rising and no one knows how high rates will go. Opting for a tracker mortgage could therefore prove more expensive over the term of the deal than a fixed rate.

For example, someone with a £100,000 25-year repayment mortgage would pay £443 a month at HSBC's lifetime tracker rate of 2.39%.

However, if interest rates go up by 4.50% -the amount base rate fell by between October 2008 and March 2009 - their mortgage rate would increase to 6.89%, which would mean monthly payments of £700.

By contrast, if they opted for HSBC's five-year fix at 3.99%, their monthly payments would be £527 - so higher than the tracker initially but at least they would know how much they'll be paying for the next five years.

If the prospect of higher mortgage payments concerns you, it's always worth opting for the security of a fixed rate. If on the other hand you're happy to take a gamble and go for a variable rate there are other options which mean you can limit the risk.

A halfway house

The good news is that borrowers can sit on the fence by mixing and matching deals, says David Hollingworth at broker London & Country.

"Most lenders allow their mortgage customers to limit their exposure to rising interest rates by putting part of their mortgage on a fix and part on a variable rate deal. This way they can benefit from the currently lower variable rates and will only be partially affected by rising rates due to the fixed element. Basically, it's a way of hedging your bets."

However, Hollingworth warns that lenders will often charge two fees - one for each element of the mortgage - and with arrangement fees on some of the best mortgage deals soaring into thousands of pounds, this plan could prove a false economy.

Even where your lender charges just one fee on either the variable or tracker parts of the loan, it will be the biggest one you get billed for, adds Hollingworth.

Switch and fix

Some lenders, such as Nationwide and Woolwich, offer a 'switch and fix' option across their whole range of tracker deals - a facility also sometimes referred to as 'drop lock'.

This allows borrowers to take advantage of the low rates of a tracker but, if and when the base rate start to rise, they can jump onto any one of the lender's fixed rate deals without incurring an early repayment charge (many mortgage products will charge you a penalty if you want to get out of the deal part-way through the term).

Bear in mind though, that this will also typically translate into two sets of arrangement fees - one for taking the tracker and one for taking the fix which, especially if you switch quickly, could really hurt your pocket.

One option is to sidestep the initial tracker fee from the start. Under Woolwich's Great Escape remortgage package, existing homeowners with a 30% deposit can get a tracker at 2.68%. The deal comes with no application fee, free legal work and valuation - as well as £300 cash back to cover your existing lender's exit fee.

Trackers with a cap

Although the deals are few and far between, a handful of lenders offer a different kind of hybrid between fixed and variable deals - a capped tracker. As it says on the tin, this is a tracker mortgage that comes with a ceiling above which the rate cannot move.

The Mortgage Works for example has a three-year tracker deal with the rate capped at 1% above the initial rate, which start from 3.89%.

Securing freedom from the start

You don't have to split your mortgage between deals or limit yourself to a special products if you want to sit between variable and fixed - you could simply take a tracker mortgage that comes with no tie-ins from the word go. HSBC for example, has a lifetime tracker deal currently at 2.39%.

As well as being cheap to sign up for the deal (the fee is just £99), borrowers can leave at any time free of charge as it comes with no early repayment charge so you can remortgage onto a fixed rate at any time without penalty - this could prove handy if interest rates rise further or more quickly than you anticipate.

That said, switching just your mortgage deal to within the safety net of the same lender, is likely to be a lot easier than jumping ship to an entirely new lender - especially if your circumstances have changed or the price of your property edged downwards.

You can compare fixed and tracker mortgages through moneysupermarket.com or, if you need some help, speak to a qualified adviser.

Keep prepared...

Whichever of the above scenarios you choose it's a good idea to have a contingency for your mortgage repayments. This is because by the time base rate does rise and prompts you to take shelter with a fix, even the price of fixed deals is likely to have been hiked up by lenders. What you see today may not be what you get tomorrow...

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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