Despite an imminent rate rise tracker mortgages still offer good value
8 June 2006
Although interest rates remain pegged at 4.5%, consensus argues it’s likely they will rise at least a quarter point before the end of the year, so price comparison website moneysupermarket.com asks whether now is the time to fix, or get a tracker mortgage instead.
With rates on an upward trend the usual advice would be for first time buyers or homeowners looking to remortgage to opt for a fixed rate, to be certain in the knowledge they would not see their monthly mortgage payments rise. However, moneysupermarket.com urges homebuyers not to get caught up with short term rate worry and instead to take a long term view.
Even without a recent base rate rise fixed rate mortgages have risen by at least 0.25% since August last year due to the impact of longer-term market uncertainty pushing up swap rates. Taking that into account and working on the basis that, long-term (over next two years), the base rate remains stable around the 4.75% mark, it would be silly to suggest that all homebuyers should automatically opt for a fixed rate – especially as better value can currently be found in the tracker market.
Louise Cuming, head of mortgages at price comparison website moneysupermarket.com, said: “It’s not always as clear cut as fix or tracker. What people should be asking themselves is whether they are already at the top level of affordability when it comes to their monthly outgoings. If so, and if even a small rise is base rates would stretch this, then they would be wise to opt for a fixed rate. If they have some leeway available then they would be better off with a tracker because, ultimately, all the pointers indicate that rates are unlikely to rise significantly in the next two years.”
moneysupermarket.com's analysis shows a difference of £1164 between the best tracker available and the best fixed rate mortgage on a true-cost basis over two years. A remortgage for £150,000 with Portman BS at a 4.59% fixed rate would see monthly payments of £854 and £20,801 paid over two years on a true cost basis. A flexible tracker mortgage with PMS BM Solutions at 4.05% would see monthly payments of £800 and £19,637 paid over two years – a difference of £1164 in favour of the tracker product.
Of course, if the base rate rises the tracker mortgage will become more expensive. But if they were to rise by 0.25% to 4.75% someone on the 4.29% tracker mortgage with Portman would see their payments go from £827 pcm to £839.94– but over two years they would still only pay out £20,208.56, £592.44 less than the cheapest fixed rate currently available from the same lender.
