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To fix or not to fix

We are first-time buyers looking to get on the housing ladder. With the Bank of England base rate at a historical low of 0.5 per cent we are inclined to go for some form of tracker product rather than fix. Is this a wise move and would we be better off going for a lifetime tracker rather a two, three or five-year product?

There are a variety of issues for first-time buyers to consider when it comes to choosing a mortgage and the option of whether to go for a fixed, tracker or discounted product is one of the most fundamental. An adviser can give their own thoughts but the choice will generally be determined by what the borrower thinks interest rates are going to do over the next couple of years.

The 0.5 per cent base rate has meant there has been real value to be had with tracker products and while inflation has risen recently, suggesting an interest rate increase may be made sooner rather than later, we should also acknowledge that this month’s meeting of the monetary policy committee saw unanimous agreement to hold the rate at its current level. Because of this, it is unsurprising that borrowers are drawn to trackers, particularly if they believe that base rate will continue to be this low for the next 18 months or so.

Term and lifetime trackers are almost identical in their design apart from some key advantages that a lifetime tracker holds. Early repayment charges are generally not payable for a lifetime tracker, unlike with term trackers, where a charge is payable for at least the term of the initial incentive tracker period.

I anticipate most first-time buyers choosing a first mortgage will be looking for stability and therefore will prefer to opt for the security of a fixed rate mortgage

Also, the arrangement or booking fee payable can be less for a lifetime tracker. Unlike term trackers, where after the initial incentive period ends the borrowers’ rate will normally revert to a possibly higher standard variable rate or remain linked to the rate being tracked but at a higher percentage, the lifetime trackers remain at the margin over the rate being tracked for the full term of the mortgage.

The overall cost calculation of a lifetime tracker rate can be significantly lower when considering the ongoing costs of remortgaging such as valuation fees, legal fees and lender arrangement fees.

The flexible benefit of a lifetime tracker is more obvious for those who have very large deposits/equity in terms of securing a low initial payment rate. For example, at 65 per cent LTV, a lifetime tracker product can be obtained currently at a very competitive 2.39 per cent (1.89 per cent over base rate).

However, I anticipate most first-time buyers choosing a first mortgage will be looking for stability and therefore will prefer to opt for the security of a fixed-rate mortgage.

At present, fixed-rate deals are more expensive than tracker alternatives at 90 per cent LTV. The best two-year fixed deal for a 90 per cent LTV borrower at the moment is around 5.49 per cent and for five years at 5.99 per cent. However, a lifetime tracker alternative is available at 4.49 per cent (3.99 per cent over base rate).

It is anyone’s guess how long base rate will remain at 0.5 per cent. If the borrower does opt for the tracker, any first timers on a controlled budget who need to know exactly how much they will be paying each month may find they need to keep one eye on the movement in base rate. In the above example, it would only need to increase by 1 per cent for the benefit to be lost.

At this point, it really becomes an affordability question – if the borrower opts for the tracker product, how much would the base rate have to rise before the mortgage became unaffordable?

Borrowers, particularly those seeking loans at a higher LTV, must weigh up the potential short-term benefit of taking a tracker with the understanding that, given where base rate is, their monthly mortgage payment is likely to increase over the next few years. Against this, they have the option of fixing their monthly payments for the duration of the deal but with the understanding that they will be paying more each month for that certainty.

Michael White is chief executive of Email Mortgages

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