To Fix ? or Not to Fix ? - that is the question...
Whilst this question is not quite Shakespeare, it often causes dilemma when choosing a mortgage product. There are many types of mortgage products with the two most popular options being Fixed Rate products and Tracker Products.
Here is an overview of the two product types
Fixed Rate Product
- Your rate of interest is fixed for the chosen period
- Your monthly mortgage payments are fixed for the chosen period
- This means a change in external interest rate will not affect your payment
- Its a good method for budgeting your monthly expenditure
- Many first time buyers prefer this option
- Traditionally fixed term products have been more expensive than tracker products
- These products are more expensive as the term of the 'initial deal' period increases
- Products can be fixed for 2,3,5,7,10,15 years and even for the lifetime of the mortgage
- Your rate of interest is set according to a 'margin' against the Bank of England Base Rate.
- This does mean that the rate of interest you pay can change during your chosen initial 'deal period'
- Your monthly payments can change dependent on how your tracker rate changes
- You can take advantage of lower rates and monthly payments if the Bank of England lowers the base rate.
- If the Bank of England increase the base rate - your rate will increase and so will your monthly payments
- Tracker Rates are generally cheaper than Fixed Rate products
- Tracker products are available for 2,3,5,7,10,15 years and even for the lifetime of the mortgage
The differential pricing between Fixed Rate mortgages and Tracker Rate mortgages has traditionally meant fixed rate mortgages have been more expensive than Tracker Rates.
So the compelling reason for paying a higher price for a mortgage product has been around reassurance that your mortgage payment will not increase during a chosen period.
Bank of England (BOE) Interest Rate Effect
Post the financial crisis of 2007 UK interest rates have remained low and actually in the last 10 years BOE rates have been on or below 1.5%. There have been two increases of 0.25% during this time. So it seems over the 10 years choosing a tracker product would have probably saved you money - hindsight is a wonderful thing!
Fast forward to 2020 and the Covid-19 effect on the financial markets. The BOE rate was dropped to an all time historical low of 0.1%. Mortgage borrowers already on tracker rates start to see savings on their monthly payments.
The mortgage lending market has been overhauled due to the effect of Covid-19. The pricing differential between fixed rate products and tracker products has decreased with many lenders offering the same rate for both tracker and fixed rate products.
New Mortgages, Remortgages and Product Switches
No matter what your current objectives, some things to consider before choosing a product type would be,
- Historical BOE interest rates have been very low, the decisions that are keeping these rates low are based on a fragile economy - with the effects of Covid-19 the economic outlook is one of a 'worsening' economy. The likelihood of rate increases are minimal and as for the rate decreasing, we don't have much room since the rate is already at 0.1% .
- If you want the reassurance of fixed monthly payments and with tracker rates similarly priced to fixed rates - this is a good option for you. After all when the economy does improve, the effect on BOE rates will be 'positive' - they are likely to increase. So it does make sense if you intend to keep your property for the longer term, go for a longer term fixed rate now - securing the best available rate.
The only caveat to the above being unforeseen and unexpected changes to your circumstances may mean you need to sell your property. If you redeem your mortgage during any initial deal period - you may have to pay an early repayment penalty.