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While there’s plenty of talk about when the Bank of England will raise inerest rates, there’s no indication of it doing so in the near future.
In fact, one leading housing market commentator, Roger Bootle, reckons the base rate will remain below 1% for the next five years.
And a study by the Centre for Economics and Business Research, while not as bullish as Bootle, still predicts that the base rate will stay at 0.5% until 2011 at the earliest and remain under 2% until 2014.
So what does all this mean to mortgage holders and first time buyer wannabes?
The gist of it is that despite the fact there will never be any clear consensus among economists about which way rates are heading, no-one is predicting they’ll rapidly go up.
This is the sort of thinking that will make variable rate tracker mortgages more appealing. So it’s worth taking a look at just what the savings are for those opting for a variable rate compared to fixed mortgage now.
What’s immediately clear is that all variable rate deals, regardless of which type they are – trackers, discounted or standard variable rate – are at least a full 1% cheaper among the best buy products on the market when compared to their equivalents in the fixed rate arena.
Tracker and other deals
One offer stands out at the moment – HSBC’s two-year discounted rate at 2.29%. The drawbacks are a massive £1,499 arrangement fee and the fact you need at least 40% equity to secure yourself a deal. But it does give a flavour of just how cheap mortgage deals are at the moment.
Compared to the HSBC’s discounted deal, the best fixed rate and tracker deals are the Principality Building Society’s 3.44% fixed rate for two years and which comes with a £999 price tag and ING Direct’s 2.59% two-year tracker which comes with a £795 arrangement fee. Likes HSBC’s variable deal, these two are only available for those with a 40% deposit.
It’s when these seemingly small differences in percentages are converted into hard cash that the attraction of going for a tracker rate mortgage truly reveals itself. On a straightforward repayment mortgage of just £150,000, the tracker would set you back £680 a month while the fixed rate would cost £746. Over just the two-year length of the tracker, that would save you more than £1,500.
The key is for anyone still pondering the benefits of a fixed rate is to ask themselves whether they think rates will increase by more than 1% over the two-year lifespan of a discounted mortgage. And if they think like most economists, then their answer will be a confident “no”.
So far, so good. But there’s an extra difficulty when making such a choice. If you think rates will stay low for a couple of years, then you might well be thinking like Roger Bootle who reckons they will stay below 1% for the next five years.
So why settle for a good deal on a two-year discounted mortgage which could – if you and Roger Bootle are right - be bettered if you went for a lifetime tracker mortgage!
For those with large deposits and equity...
There are some outstanding deals on these - again providing you have a 40% deposit. Top of the list must be HSBC’s term tracker at just 2.49% (the current base rate plus 1.99%). Although it offers an excellent rate, it’s real attraction is that it allows you to escape to a fixed rate deal – without any early repayment charges – if the unthinkable does happen and rates start shooting up unexpectedly. It’s difficult to see how anyone can lose with a deal like this.
However, don’t make the mistake of assuming all trackers allow a cost-free escape route should the going get tough. HSBC’s deal of having no early redemption penalty is very much the exception. Check first if opting – or being forced – to find an alternative tracker.
That said, some lenders have cottoned on to this waryness of borrowers to go for a variable rate and have helped take some of the risk out of it by allowing them to switch from their tracker rate to their fixed rate products if rates start to rise. A notable example is the Nationwide that allows all borrowers on its tracker range to do this.
So, with these safeguards in place, why would anyone risk going for a fixed rate?
The simple answer to that is that economists don’t have enviable record on predictions. They might well be wrong, in which case selecting a fixed deal at the great rates they are offering right now, might still prove a winner.
But if you can take a smallish risk over the next couple of years – as many borrowers are choosing to do, here are some of the leading variable rates deals available:
HSBC: Two-year discounted rate at 2.29%. Fee £1,499 Max loan to value (LTV) 60%
HSBC: Full term tracker at 2.49% (base rate plus 1.99%) Fee £999 LTV 60%
ING Direct: 2-year tracker at 2.54% (base plus 2.04%) Fee £795 LTV 60%
First Direct: Full term tracker at 2.58% (base plus 2.04%) Fee £795 LTV 60%
Santander: 2-year tracker at 2.59% (base plus 2.09%) Fee £995 LTV 70%
For those with a deposit of only 20% or less, there are still some good deals, including:
NatWest: 2-tear tracker at 2.99% (base plus 2.49%) Fee £999 LTV 80%
Yorkshire BS: 2-year tracker a7 4.39% (base plus 3.99%. Fee £495 LTV 80%
NatWest: 2-year tracker at 4.69% (base plus 4.19%) No Fee LTV 90%
