Fixed, Variable or Tracker - if you're buying today.

[h4rm0ny]

So a friend has asked for my opinion on whether she should go for a Fixed, Variable or Tracker mortgage. Friends tend to come to me for this sort of stuff because I'm fair at maths and logic. Like most people who aren't, they confuse these things with being informed. And if I knew how to reliably and precisely forecast interest rates, I'd be off for my prize in economics right now.

So, a strawpoll of GD's resident experts along with any as to what they think is best right now. I would prefer not to give advise (knowing my limitations) but this particular friend could really use it so I'm suspending my say nothing policy. Currently, I've given my opinion that if they can't afford the payments to go up, get a Fixed. I told them that Tracker is for people who can afford the risk of it going up. I personally can't see a house boom in the next five years so expect interest rates to stay low to prop up the market. So I would opt for Tracker myself ideally, if I could make the payments fairly comfortably.

Thoughts?

 

[dowie]

I went for a tracker a while ago as the rate was low and frankly it meant I didn't need to re-mortgage again after 2 or 3 years.

Really they ought to speak to a mortgage advisor after giving details of their financial situation etc..etc.. and then take the advice there - I'm not sure that random subjective opinions of whether rates will rise over the next year or two (they probably will tbh..) are too helpful here.

 

[Destination]

If they can't afford for payments to go up, then they need to consider borrowing less.
Put simply, payments over the next 2 to 5 to 10 years are only going to go up.
They can't go down any further, and they won't go down any further.
If they 5 year fixed, they better be ready for a potential jump when it comes to the other end of that fixed, and be ready to pay more.

Anyway, without knowing what they are borrowing, the term, where they are borrowing, how long they plan to stay there, and the value of the property, then it is hard to advise.

Do the mortgage checked on mse, as good as anything for rates comparisons and style comparisons.

 

[h4rm0ny]

Thanks both. I know the question is a bit of a fool's quest and I know they shouldn't be seeking advice from anyone other than an independent professional. However, with this specific individual, I feel more comfortable telling them something rather than leave them making wild assumptions. I know that my assumptions will at least be "well, probably this" rather than some dramatic confidence.

Why do you both anticipate a marked rise in interest rates? Sensible caution aside, you both sound like you think the good times are over. With Brexit, Corbyn and the general state of things, I don't see the confidence necessary for a housing boom any time soon. Am I wrong?

 

[The_Abyss]

Interest rates are not just there to try and regulate the housing market - far from it.

 

[h4rm0ny]

I went for a tracker a while ago as the rate was low and frankly it meant I didn't need to re-mortgage again after 2 or 3 years.

I went for a Five Year Fixed four years ago. Was a mistake in retrospect but I was overly-cautious and worried about it rising. Would have saved a nice little sum had I gone Tracker. But I accept I got the certainty and there would be a price for that. Didn't anticipate interest rates staying so low. The offers available out there right now seem really low to me compared to what I'm on. :/

 

[h4rm0ny]

Interest rates are not just there to try and regulate the housing market - far from it.

This is my mistake, then. I have gotten into the habit of thinking of them in terms of this.

 

[Buffman]

I'd go for a 2 year tracker, as they're unlikely to do you wrong in that period I think. Even if they went up 0.25% it's still probably cheaper than a fixed depending on LTV ratios.

Really depends on LTV ratios, income and outgoings (eg if they have plans for kids, job moves etc).

For what it's worth my mortgage is a high ratio of our combined earnings, and I still went tracker.

 

[Rifte]

My mortgages have tracked since 2008.

With the split decision in the last BOE meeting it seems interest rates are going to go up at some point this year on the back of a Brexit induced inflation.

The real question I suppose is by how much.....

I am completely unqualified to make this statement, but I cant see rates going back to the 5% plus days, hell I think we will even struggle to get back to 3% anytime soon.

The downside of cheap credit is that a lot of people have borrowed more than they normally would, be it in bricks or mortar or unsecured. You pull the heroin life line away in a country where the living wage is dropping and we have a crisis on our hands.

Back to your initial question though? I would track.

 

[h4rm0ny]

Thanks!

 

[EddScott]

At the risk of going off topic, why would the BOE raise interest rates for to Brexit inflation?

If inflation is imported due to the low pound, wouldn't raising interest rates just make things worse?

On topic, I fixed two years ago for 5 years on a decent rate on my home. I have one mortgage which is 0.5 above base for the life of the mortgage. That's been a bit of a result.

 

[Scrutinize]

So a friend has asked for my opinion on whether she should go for a Fixed, Variable or Tracker mortgage. Friends tend to come to me for this sort of stuff because I'm fair at maths and logic. Like most people who aren't, they confuse these things with being informed. And if I knew how to reliably and precisely forecast interest rates, I'd be off for my prize in economics right now.

So, a strawpoll of GD's resident experts along with any as to what they think is best right now. I would prefer not to give advise (knowing my limitations) but this particular friend could really use it so I'm suspending my say nothing policy. Currently, I've given my opinion that if they can't afford the payments to go up, get a Fixed. I told them that Tracker is for people who can afford the risk of it going up. I personally can't see a house boom in the next five years so expect interest rates to stay low to prop up the market. So I would opt for Tracker myself ideally, if I could make the payments fairly comfortably.

Thoughts?

First consideration is how much they need to borrow and who will lend that amount. It can be different for everyone. This can depend on employment type and income, household income thresholds, property LTV, number of dependents, fixed and variable outgoings etc. This can lock out or open up the rate options as not everyone has access to the best deals.

For example HSBC offer me the lowest rates but won't lend anywhere close to Halifax and Santander, which still seem to offer the highest salary multiples of all the lenders.

Some lenders are still relatively easy to apply with and some not. I know people who haven't been able to remortgage with their current provider as their circumstances changed and the lenders criteria have changed. For one colleague by going for a short term 2 year fixed it saved them the most money initially but they didn't plan ahead and would, given they can't remortgage onto a sensible rate now with anyone, have been cheaper to go 5 or 10 year fixed at the time.

Some lenders apply a blanket assumption on the affordability for variable outgoings whereas some lenders go though everything with a fine tooth comb requesting months of bank statements, all your credit card statements etc etc.

The lender will or should advise on the best deals and most suitable option depending on their circumstances and future needs. Some lenders have really good in branch advisors.

The other option is to find an independent broker as they can access less known lenders or leverage higher loan to salary multipliers. Good ones don't charge much in fees and nothing upfront.

I would personally say if their circumstances are likely to change to their financial detriment which may affect future remortgaging pick a long term fixed (eg planning kids, taking a career break or step back etc).

Check on early repayment fees on long term fixed as well but some lenders will not apply these if you move house but retain a mortgage with them.

 

[Rifte]

At the risk of going off topic, why would the BOE raise interest rates for to Brexit inflation?

If inflation is imported due to the low pound, wouldn't raising interest rates just make things worse?

As a general rule of thumb the usual mechanic to slow down inflation is to increase interest rates and consequently the price of borrowing to slow down consumer spending.

Carney has said for a number of months that because of the impact Brexit has or will have on our economy he has a tolerance threshold for the inflation target.

Normally and for numerous months the decision has been usually unanimous or perhaps with one dissenter in maintaining our historically low interest rates. This month though is was a 5:3 divide which indicates that a raise in more and more likely to hit the table unless inflation slows down.

 

[Destination]

My mortgages have tracked since 2008.
The real question I suppose is by how much.....
I am completely unqualified to make this statement, but I cant see rates going back to the 5% plus days, hell I think we will even struggle to get back to 3% anytime soon.
Back to your initial question though? I would track.

Tend to agree, it'll go up, but not loads, maybe to 3% over a sustained period of alleged growth. Main issue with mortgages now, is the banks have build slightly larger and lager cushions between them and the base rate into such products. So a 3% base rate, will be heavy enough mortgage rate. At a rate of 7%, interest doubles your mortgage in 10 years, In 25 years its nearly 5 times the amount, such are the issues with compounding. Now, obviously in a capital payoff this isn't as big an issue as the overall loan amount is dropping. So it isn't quite the effect.

 

[h4rm0ny]

Tend to agree, it'll go up, but not loads, maybe to 3% over a sustained period of alleged growth. Main issue with mortgages now, is the banks have build slightly larger and lager cushions between them and the base rate into such products. So a 3% base rate, will be heavy enough mortgage rate. At a rate of 7%, interest doubles your mortgage in 10 years, In 25 years its nearly 5 times the amount, such are the issues with compounding. Now, obviously in a capital payoff this isn't as big an issue as the overall loan amount is dropping. So it isn't quite the effect.

Massive impact on Interest Only mortgages though, I presume. Are there still lots of BTL landlords with Interest Only mortgages relying on house value increase for the final pay off? Or were there ever? I seem to recall that being quite popular not long ago.

 

[Vonhelmet]

I'm 7 years into a 10 year fixed. I'd have saved a fortune on a variable or tracker. That being said, when I remortgage I'll probably fix for as long as possible again as I'd rather overpay than risk things jumping in the short term.

Variable or tracker is fine if you have the discipline to put a decent chunk into savings to hedge against a future rate rise. If rates go up, you're ready for it; if they don't, you've got a shedload of cash sat waiting for you. The people who screw this up are those who mortgage up to their eyes on a variable or tracker without any room for manouveur if rates go up.

 

[Rifte]

Massive impact on Interest Only mortgages though, I presume. Are there still lots of BTL landlords with Interest Only mortgages relying on house value increase for the final pay off? Or were there ever? I seem to recall that being quite popular not long ago.

Yes thats still a 'thing' . I am a BTL landlord but I didnt have the nerve to go with an interest only deal, its far too risky in my opinion.

Saying that though I have a friend who owns 8 properties in London on interest only and after all being said and done with expenses he picks up around 6k a month in profit on them. Very nice!

Plus at the moment he has the London house price bubble to enjoy.

 

[Django x2]

I'm 7 years into a 10 year fixed. I'd have saved a fortune on a variable or tracker. That being said, when I remortgage I'll probably fix for as long as possible again as I'd rather overpay than risk things jumping in the short term.

Variable or tracker is fine if you have the discipline to put a decent chunk into savings to hedge against a future rate rise. If rates go up, you're ready for it; if they don't, you've got a shedload of cash sat waiting for you. The people who screw this up are those who mortgage up to their eyes on a variable or tracker without any room for manouveur if rates go up.

You're not overpaying though. Your total amount repayable on the fixed term is longer than on the variable (assuming the rates are different, which they almost always are).

I'm assuming that you're paying what the fixed term repayment is each month thought and not overpaying on that amount.

Interestingly, overpaying by £50 a month to a mortgage can reduce it's term by upto 7 years on typical loan amounts.

 

[Vonhelmet]

You're not overpaying though. Your total amount repayable on the fixed term is longer than on the variable (assuming the rates are different, which they almost always are).

I'm assuming that you're paying what the fixed term repayment is each month thought and not overpaying on that amount.

Interestingly, overpaying by £50 a month to a mortgage can reduce it's term by upto 7 years on typical loan amounts.

I mean overpaying in the sense that I'm paying 5.49% interest when I could be paying 2.49% or something.

In any case, I am overpaying by quite a fair bit in the sense of paying more than the agreed amounts, and I fully intend to keep doing so. I'm hoping to clear the mortgage by the time I'm 50, which would mean taking 15 years off the original term.

 

[a1ex2001]

Interest rates aren't going anywhere soon if they go up it will be tiny steps and some are likely to be reversed it will be very hard to make a sustained increase stick the days of a 3% rate are a long way off and 5% is a fantasy anytime in the next decade.