Unbiased.co.uk has recently found that only 49 per cent of respondents reviewed their mortgage in the last three years, with the average rate being paid at 4.63 per cent. Just 45 per cent of respondents had reviewed their tracker mortgage in the last three years, with the average tracker rate being paid at 3.16 per cent. Although not all are in a position to renegotiate, for those that are, the question is whether to fix or track?
ON THE RIGHT TRACK
In recent years, trackers have outperformed fixed rate mortgages. Craig Taggart, head of mortgages at Baigrie Davies, notes that “if you opted for a tracker rate in 2007/early 2008 you are probably very happy as you will be tracking at anything from 0.29 per cent to 0.99 per cent over the Bank of England base rate – however, if you fixed at the same time you would have been on a rate of around 5.99 per cent.”
Although the spread between tracker and fixed rate mortgages isn’t as attractive as three years ago, Simon Webster, managing director of Facts & Figures Financial Planners thinks a fixed versus variable over five years “is almost a no brainer – at the moment variable wins hands down.” This is because with only 0.25 per cent increments the norm in these fragile economic times, four rate rises are needed for a 1 per cent increase. However, he rightly cautions that “12 months out the picture becomes cloudier,” but thinks “unless inflation rears its head (and deflation is more of a worry now) it is very hard to make a case for rising interest rates any time soon.” However, Webster does acknowledge that a “fixed rate becomes far more important for those on fixed income or those with limited spare disposable income available against future rate rises.” This is the key point.
ALL ON RED
Choosing between a fixed and variable rate mortgage may look on the face of it like a gamble – but the only real gamble is in choosing a tracker. Doing so might, or might not, turn out to be the better decision, but only those that can afford to take the hit of rate hikes should opt for this. There are few people whose risk profile includes being chucked out of their house because they can’t afford repaying the mortgage.
Dan Plant of MoneySavingExpert.com says: “By their very nature, fixed rate mortgages give borrowers surety of what will be going out of their pockets – especially in the age of austerity, knowing exactly how much a mortgage will cost for a set period can be crucial to homeowners without much wriggle-room in their budget.”
No central banker – except perhaps Paul Volcker – wants to raise interest rates. They are forced to by inflation. Although there are academic arguments for the monetary injections that are taking place, central bankers aren’t scientists, they’re butchers. A supposed liquidity trap can quickly turn inflationary. Japan offers the depressing image of a deflationary spiral – yet this is an historical anomaly – inflation could let rip at any moment. Recently, MPC hawk Martin Weale put the cat among the pigeons, saying it was “perfectly possible” that the first rate rise would come earlier than mid-2014.
Whether we get inflation or deflation, if you are sitting on a tracker hugging the base rate the chances are you’ll never have it so good. Taggart sees difficult times ahead in the mortgage market, with banks tightening lending criteria, changing lending policies and the cost of introducing the FSA’s Mortgage Market Review (MMR) proposals.