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With interest rates on their way down we turn our thoughts to mortgages and look at what's best - fixed, discounted or trackers. If you're likely to be changing your mortgage in the near future then it's sensible to think ahead. Hopefully our short guide will help you understand the issues.
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The Great Mortgage Conundrum - Fixed, Discounted or Tracker?
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With interest rates on their way down and over 1.5 million people reportedly coming to the end of their fixed rate mortgages this year many borrowers are faced with a quandary. Should you take a new fixed rate, settle for one of the discounted deals or go for one that tracks the Bank of England Base Rate?
FIXED RATES
Even though rates are on their way down it doesn't necessarily mean you should ignore the fixed rate deals. It's looking likely that the base rate will reduce further when the Bank of England meet this Thursday but the markets have already factored this into their calculations so it doesn't automatically mean that a reduction in base rate will lead to a further fall in fixed rate deals. Indeed if you come across a good fixed rate deal it could be worth snapping it up before it disappears as many of the best deals are not around for long. And, always remember that with a fixed rate at least you know where you stand and you're protected if rates do start to rise again.
BASE RATE TRACKERS v DISCOUNTS
If you prefer to take your chances and bet on rate reductions to come then you need to decide whether you want to opt for a discounted rate or one that tracks the Bank of England Base Rate. At first glance these may seem like pretty similar deals and you could be forgiven for thinking that both will vary if base rates change. However, you couldn't be more wrong.
The difference between the two is that a tracker mortgage is linked directly to Bank of England Base Rate over which the lenders have no control, whilst discounted rates are linked to what's called the lenders Standard Variable Rate or SVR. And here's the catch - lenders don't have to change their SVR by the same amount as the Base Rate, and frequently don't. Indeed, it's quite common for lenders to reduce the SVR by less than Base Rates when rates are coming down and to put them up by more when they are going up. And, worse still, some lenders refuse to pass on any reductions at all. All of which means they are increasing their profits at your expense.
This doesn't necessarily mean that you should ignore all discounted mortgages but you should go in with your eyes open and know what to expect when rates change. However, before you make your choice there are a few other points you need to consider carefully. Here's a quick guide to other things to watch for;
OTHER THINGS TO CONSIDER
- Watch out for fees. Many lenders charge up front arrangement fees - particularly to access their most attractive rates. These can be either a fixed amount or a percentage of the loan. Make sure you take the cost of the fee into your calculations when looking at how competitive the deal is overall.
- Take advice. If you're still unsure then consider taking advice form a mortgage broker or IFA. These days brokers have to outline any fees you will be charged up front so you will know what costs you are likely to incur and they may have access to deals that you can't get directly. They will also be able to help you decide which deal is best for your own individual circumstances.
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