Should you opt for a tracker mortgage? Narrowing rates may make fixed rates expensive
It is no longer a “no brainer” to go for a fixed rate mortgage with the price gap between variable and fixed deals becoming “more marked” than has been the case in years.
Data from Moneyfacts has shown that the average rate available on a two-year fixed rate deal has now passed 4%, the first time this has happened in almost a decade. This comes off the back of the largest month-on-month increase since 2007.
Some mortgage advisers have argued that the case for variable deals has become more compelling in recent months as a result of these rate increases, though other intermediaries caution that the difficult economic situation means clients could be cut “adrift” on unaffordable variable deals should the base rate continue to be increased on a regular basis.
Opting for fixed deal not “cut and dry”
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, said the difference in pay rates between fixed and variable deals is “more marked” than it has been in some time, meaning that opting for a fixed is no longer the “cut and dry” decision it previously was.
He said: “It wasn’t that long ago that taking a fixed rate was a no-brainer for most people – a variable rate was about the same cost and had the added risk of rates increasing.
“However, now you can be looking at fixed rates carrying quite a premium over the equivalent variable rate, which gives cause for a pause and bit more of a conversation with clients, as it could take a number of interest rate rises before the variable rate even reaches, let alone exceeds, the equivalent fixed rate.”
Absorbing higher payments
The risks of a variable deal backfiring are “huge”, warned James Miles, director of The Mortgage Quarter.
“I’m only seeing clients who are earning well above the national average consider a tracker rate as they feel they can absorb potential higher payments on their mortgage along with the pocket-busting inflation rate heading well above 10 per cent,” he explained.
However, he argued that short-term deals should not be out of the question if the country is set to head into a recession, since rates could drop back down, meaning that “tying into a lender could be walking into a financial trap”.
What helps you sleep at night?
Carmen Green, mortgage and protection adviser at Xpress Mortgages, said that while some clients sleep better at night knowing that their interest rate is fixed, others are much happier knowing they are paying the lowest interest rate they qualify for, adding “value means different things to different clients”.
She added that she does a calculation with clients to compare the fixed and tracker rate, to work out what sort of ‘buffer’ they would have before the cost of the tracker meets that of the fixed rate, to give them a better insight.
Variables – “a more competitive option”
Variable mortgages ‒ particularly discounted variables ‒ offer a “more competitive option” at the moment since they follow the lender’s standard variable rate rather than the base rate, according to Dee Ganesharajah, senior associate at Mesa Financial.
She said: “Market trends seem to imply that SVR rates are likely to change less frequently than tracker rates or be as affected by changes to the Bank of England rate.”
Ganesharajah added that buy-to-let landlords have been more open to variable deals because of the lower rates on offer than owner occupiers, adding: “Quite frankly the only way to approach the situation is based on the individual’s needs and priorities.”
An element of risk
Jane King, mortgage and equity release adviser at Ash-Ridge Private Finance, said there is an “element of risk” that further base rate rises will mean variables end up more expensive than fixed rates over time.
She continued: “I do wonder if banks are making these attractive on purpose, with an eye to them increasing quite sharply in future and so making some additional profits.”
King said that trackers are proving useful for those who may be looking to sell within a couple of years, but noted that the fact that many come with no early repayment charges means longer-term borrowers know they can switch to a fixed rate deal in the future without penalty.
“As with everything, it’s about the borrower’s attitude to risk,” she concluded.
Are trackers worth the gamble?
However, other brokers emphasised that the current economic situation meant that tracker deals were a real gamble that may not pay off.
Graham Cox, director at SelfEmployedMortgageHub.com, said that while tracker rates are cheaper than fixed rates, they are “incredibly risky” right now unless the client is in a very good financial situation.
He continued: “Who knows where the base rate is going to end up in the next year? Fixed rates provide certainty that your mortgage payment won’t rise which, given the current economic outlook, can only be a good thing.”
Lewis Shaw, founder of Shaw Financial Services, noted predictions from Citi that inflation could rise to 18 per cent within months, with base rate potentially moving to as high as seven per cent in order to contain that inflation.
Anyone on a tracker, in those circumstances, would “see their monthly payments shoot up out of all recognition”.
He continued: “On balance, given our economy’s turmoil, it’s safer to be moored in port on a fixed than adrift in the storm on a tracker.”