Fixed-rate or tracker?

The recent increase of Bank of England Base Rate to a heady 4.5% is bad news for anyone with a mortgage.

Just over two years ago, that bank rate was 0.1%. An affordable mortgage then may have become a commitment to monthly repayments that are much less affordable now. And there could be more hikes to come. The money markets seem to be factoring a peak of 5% by the end of the year. 

All mortgages are likely to increase in cost – and the increase for anyone coming to the end of a fixed rate deal could be especially painful.

But there could be ways to cut the costs.

Paying less for your mortgage

Although the bank rate may have gone up, there could be ways to pay less for your home by changing the type of mortgage you have.

There are two that may be worth considering – fixed rate, and trackers. Trackers have been a lifeline in recent months, costing much less than fixed deals – but that may be changing fast.

Looking at a fixed rate

A fixed rate mortgage looked a very good idea when the banks started to hike its own rate to deal with inflation. Those who saw that the days of historic low mortgage rates were limited rushed to fix their repayment for as long as possible. Those fortunate few who are still paying rates based on a 0.1% base rate have reason to congratulate themselves. 

However, most fixed deals are only fixed for a few years – and many of those who have been paying what are now below market rates are finding that their fixed period is coming to an end – and that they will be transferred to a lenders standard variable rate, which will be very much higher.

But there could still be the chance to save with a fixed rate.

Fixed-rate deals soared in price at the end of last year, as worries about financial stability left markets anxious about long term commitments.  However, as stability returned, the cost of fixed rates fell. It might make sense for many to lock in, giving families the chance to avoid further increases in repayments in the months to come. 

The Base Rate is a major factor for lenders when they set their fixed-rate mortgages. Lenders set these rates based on the market’s view of what Base Rate will be in two, five or even 10 years’ time. These are called ‘swap rates’. These may be falling – meaning that the cost of a fixed rate mortgage could fall too.

The cheapest fixed-price deals are already well below the typical tracker mortgage.

Looking at a tracker

Trackers  – which are tied directly to the bank rate – were priced significantly lower than the average fixed-rate mortgage during the economic panic which followed the mini-Budget last year. Lenders face less long-term risk with a tracker, as they can keep the loans they make in line with their own borrowing costs.

There was a spike in popularity of trackers after the mini-budget when fixed rates were going up fast. That made trackers look substantially more attractive despite the fact that base rate was expected to carry on rising. 

But savings have shrunk as fixed rates have steadily dropped  – with prospects of a more stable future – and the cost of trackers rose in line with the Bank Rate. The latest rise may see any price advantage of a tracker wiped out.

What’s more, there is no ceiling on how high repayments could rise.

What should you do?

There is an escalating price war between lenders who are competing for business to hit lending targets. Despite the impact on standard variable mortgages and trackers, the rates for fixed rate deals have fallen substantially.

But there are three things to remember. 

  1. The first is that the lowest interest rates do not necessarily mean the best deal. High fees can sometimes outweigh marginal savings on similarly priced interest rates.
  2. Second, the bank rate can go down as well as up, and if inflation falls, it could leave those on a fix paying more than those on a tracker.
  3. And the third, is that expert advice is essential. If you want to remortgage, and pay less for your home, you need an independent expert to help you find the mortgage that is suitable for you. 

Fortunately, getting the help you need is easy. Call us at Continuum today.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products, you should seek independent financial advice before embarking on any course of action.

Your home may be repossessed if you do not keep up repayments on your mortgage. 

You may have to pay an early repayment charge to your existing lender if you remortgage.

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