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Mortgage - fixed or tracker?


Risso
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So, my mortgage is deal up next month. We've been offered a new two or three year base rate tracker, or a three or five year fixed deal. The difference between the cheapest/most expensive is about £200 a month. I'm going to play around with a spreadsheet to check out a few options, but what do people think is going to happen with interest rates over the next few years?

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They're only going to go up its not if, its when.

Trackers are great but a 1% rise in base rate is going to seriously ruin your day.

I'd go fixed for 5 personally, at least you know what you're going to be paying for a long ish time.

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2 year base rate tracker...

with the financial crisis in europe and spain entering recession today our interest rates wont climb very high if at all in the next couple years.

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Hold on, you're a bean counter and you're asking us!

I'm don't work in banking and I'm not an IFA!

No but in the circles you move in you MUST come across lots of the **** who do know this shit yet you offer it out to the VT massive to advise you, especially as the entire population of the island are a bunch of tax dodgers :mrgreen:

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They're only going to go up its not if, its when.

Trackers are great but a 1% rise in base rate is going to seriously ruin your day.

I'd go fixed for 5 personally, at least you know what you're going to be paying for a long ish time.

That's the gamble I suppose. I nearly did that three years ago when I took the mortgage then, and if we'd gone fixed I'd be about £12K worse off over the three years.

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Hold on, you're a bean counter and you're asking us!

I'm don't work in banking and I'm not an IFA!

No but in the circles you move in you MUST come across lots of the **** who do know this shit yet you offer it out to the VT massive to advise you, especially as the entire population of the island are a bunch of tax dodgers :mrgreen:

Half of the population are thick as pig shit Scousers! ;)

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Hold on, you're a bean counter and you're asking us!

I'm don't work in banking and I'm not an IFA!

No but in the circles you move in you MUST come across lots of the **** who do know this shit yet you offer it out to the VT massive to advise you, especially as the entire population of the island are a bunch of tax dodgers :mrgreen:

Half of the population are thick as pig shit Scousers! ;)

And the other half are inbred mongrels, which would you rather be? :mrgreen:

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As an ex financial adviser, I would say you're kind of looking at it arse about face. (I would possibly be more polite to a client, though not necessarily).

You take a fixed rate deal if stability of monthly payment is important to you e.g. a first mortgage or you have lots of other variable incomings/outgoings. You take a variable/discount if stability isn't such a big issue and or you have a track record of financial discipline. Not talking about credit rating here, more about how much of a muppet you are/n't when it comes to saving, and only you know that.

Essentially fixed rates will be, on average, over the term of the deal, a little more expensive than a tracker/variable rate, but what you get in return for the extra premium is certainty and stability.

So, which will make you better off right now? Anyone who says they definitely know which will be cheaper for you is either bullshitting or downright lying. Yeah, interest rates might well go up. But when and how quickly? By how much? Nobody **** knows, and that includes the highly paid people in the financial markets who do the vox pops on the telly.

So, that helpful? ;)

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As an ex financial adviser, I would say you're kind of looking at it arse about face. (I would possibly be more polite to a client, though not necessarily).

You take a fixed rate deal if stability of monthly payment is important to you e.g. a first mortgage or you have lots of other variable incomings/outgoings. You take a variable/discount if stability isn't such a big issue and or you have a track record of financial discipline. Not talking about credit rating here, more about how much of a muppet you are/n't when it comes to saving, and only you know that.

Essentially fixed rates will be, on average, over the term of the deal, a little more expensive than a tracker/variable rate, but what you get in return for the extra premium is certainty and stability.

So, which will make you better off right now? Anyone who says they definitely know which will be cheaper for you is either bullshitting or downright lying. Yeah, interest rates might well go up. But when and how quickly? By how much? Nobody **** knows, and that includes the highly paid people in the financial markets who do the vox pops on the telly.

So, that helpful? ;)

Well, most people would find stability nice I suppose, but then so is an extra £2,400 a year if I go on the tracker and interest rates don't go up.

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Well, most people would find stability nice I suppose, but then so is an extra £2,400 a year if I go on the tracker and interest rates don't go up.

Just gone through the same decision process as you on a new mortgage.

After being on fixed the last 5 years we are going for a tracker. The fixed not only costs more in terms of interest up front but the arrangement fees are far higher for the fixed than the tracker.

Personally while I think rates will rise I don't think they will increase enough to make the tracker the more expensive option taking into account the extra up front costs in the fixed.

I plan to save the money each month I save by being on the tracker rather than the fixed as an insurance should rates go up.

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I have done very well with my tracker the last 2 or 3 years. I moved last summer and carried over my previous mortgage and just had another small mortgage for the difference. The new chunk is fixed for 3 years so I have a 'bit of both'.

The terms an conditions of my old mortgage were also far better than anything they are currently offering so that was another reason I carried it over. Something you might want to consider?

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Thinking about it, the only case in which a tracker is worse is when rates spike immediately above the fixed and stay there for most of the first several years of the mortgage. In every other case, the tracker is better.

This assumes that you can cover the fixed's payments, but if you can't, then you probably shouldn't be buying the house anyways. It also assumes that there's no penalties for early repayment of principal.

Justification: if you take out the tracker, but make payments as if it was a fixed, you will be paying down the principal much more quickly, thereby building in more a cushion for when interest rates fall.

A 30 year 7% fixed has payments of $66.53/month per $10k borrowed. A 6% rate would imply a required payment of $59.96/month per $10k. At 7%, $58.33 of that $66.53 is interest; $50.00 of the 6%'s $59.56 is interest. Pay $66.53 on the 6% rate and you're thus paying $16.53 in principal (compare to the $8.20 or $9.96 in principal from just paying the required amount. You've effectively then converted the 6% tracker into a 359-month tracker for $9983.47 in principal, with a required monthly payment @ 6% of $59.92/month; alternatively, you can look at this as requiring a rate move to 7.01% in the second month (a not insignificant spike) to put the required payment above $66.53.

Let's say that the 6% rate is locked in for the first year. Then the following holds

[table]

[mrow]Month[mcol]Beginning Principal[mcol]Interest[mcol]Payment[mcol]Ending Principal

[mrow]1[col]$10,000[col]$50.00[col]$66.53[col]$9983.47

[mrow]2[col]9983.47[col]49.92[col]66.53[col]9966.86

[mrow]3[col]9966.86[col]49.83[col]66.53[col]9950.16

[mrow]4[col]9950.16[col]49.75[col]66.53[col]9933.38

[mrow]5[col]9933.38[col]49.67[col]66.53[col]9916.52

[mrow]6[col]9916.52[col]49.58[col]66.53[col]9899.57

[mrow]7[col]9899.57[col]49.50[col]66.53[col]9882.54

[mrow]8[col]9882.54[col]49.41[col]66.53[col]9865.42

[mrow]9[col]9865.42[col]49.33[col]66.53[col]9848.22

[mrow]10[col]9848.22[col]49.24[col]66.53[col]9830.93

[mrow]11[col]9830.93[col]49.15[col]66.53[col]9813.55

[mrow]12[col]9813.55[col]49.07[col]66.53[col]9796.09

[/table]

At this point, you're ahead of the game as long as the rate resets to less than 7.10%.

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Many of the lenders have put their rates up recently. If you go for a tracker try one of the smaller lenders discounted variables because they don't tend to put their rates up that often. The board normally has to meet before they can put their standard variable rate up, whereas with the bigger lenders like HSBC etc THEY will put ALL their tracker mortgages up almost immediately the bank base rate changes.

Personally I have one of those offset One Account mortgages because it suits my circumstances...ie I never know when I'm going to get money through!

Not sure how many UK lenders will cover the Isle of Man but one of the smaller lenders in NW was offering a cracking fee free & free legals fixed & variable re-mortgage deal. They were inundated though so had to close the book until they catch up.

Everyone thinks the comparison websites have all the best deals. They don't..they get paid big commissions and they are not whole of market.

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Many of the lenders have put their rates up recently. If you go for a tracker try one of the smaller lenders discounted variables because they don't tend to put their rates up that often. The board normally has to meet before they can put their standard variable rate up, whereas with the bigger lenders like HSBC etc THEY will put ALL their tracker mortgages up almost immediately the bank base rate changes

With respect Julie, that's a bit nonsensical.

If you're on a tracker then it will increase when the base rate increases. No board meetings or decisions to take, it'll go up the following month without fail. Irrespective of the size of the lender.

If you are going to go for a discounted or standard variable rate then fair enough - the logic above stacks up. A bit. However, a smaller lender is far more likely to play with their SVR without a prompt from the Bank Of England. You only need to see what's happened over the last few weeks with Clydesdale, Yorkshire and over the last couple of years with the likes of Skipton and Market Harborough.

Someone would be utterly mad to choose a lender just because of how they will react when the base rate eventually goes up.

As for the original question - either fix for five years if you get offered something good enough, or track for the next couple of years. Just be prepared in two years time to think that you wish you'd fixed it when you had the chance.

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