Are you considering moving house or re-mortgaging for a more competitive rate? If you plan to take out a new mortgage in the UK for either of these purposes you will be presented with numerous options:
- fixed
- variable rate
- discounted variable rate
- tracker mortgage
But which type of mortgage is best? Is there one good option for everyone or does it depend on personal circumstances?
During 2013 fixed rates were the most popular choice of home loan in the UK because they offer certainty regarding the amount of the monthly mortgage payments. This is of real benefit in a time of economic uncertainty. But now, in theory, we are moving out of the recession so is the need for such certainty so important? It is because, in reality there is still a lack of confidence in the economy and many people are still struggling with household and energy bills. There are still regular announcements of large scale redundancies in some parts of the country so fixed rate mortgages continue to be popular.
Fixed rate mortgages are usually only fixed for a short time (typically 2 years) and after that the repayments switch to a standard variable rate. So for anyone taking out a fixed rate deal now this could mean the deal expires just around the time that the Bank of England Base Rate starts to rise from its historically low rate of 0.5 per cent. Many borrowers could then be faced with a much higher monthly mortgage payment than they are used to.
1. Base Rate to remain low until 2017
A tracker rate will rise if and when the Bank of England Base Rate rises but, since it is at an historically low level, current interest rates on tracker deals are exceptionally low. In addition, experts are now predicting that the base rate will not rise from its current 0.5 per cent until 2017. Previously they had been forecasting a rise at the end of 2014. So with an anticipated base rate of 0.5 per cent for the next 2-3 years there is no good reason to take out a fixed rate mortgage at a higher interest rate.
2. The possibility of overpayments
Fixed rates offer home owners security in what amount of mortgage they will have to pay each month but they tend to have conditions attached to them, such as early repayment charges. These conditions rarely allow for overpayments or make them financially prohibitive. Tracker mortgages on the other hand offer home owners the opportunity to overpay their mortgage when they can with no financial penalty. This flexibility makes them a much better choice for borrowers who might expect a number of bonuses, dividends or commission payments during the next few years.
3. Protection from rises in lender's variable rate
The majority of UK mortgage lenders are raising their Standard Variable Rates (SVR) even though the Bank of England base rate remains at an historically low level. There is, therefore, the risk of mortgage interest payments increasing at any time for deals linked to the lender's SVR. However, tracker deals are generally linked to the Bank of England base rate (or sometimes to LIBOR) so increases in a lender's SVR will not affect the interest payments charged under a tracker deal.
4. Tracker deals are more cost-effective than long term fixed deals
In the UK during 2013 mortgage interest rates on tracker deals were approximately 1 per cent cheaper than the most competitive fixed rate mortgage deal. With the forecast for the base rate to stay the same for the next 3 years a tracker deal will represent a significant saving on average-sized mortgages and an even larger saving on bigger mortgages.
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