As Mortgage Brokers, One Thing We Get Asked A Lot Is, ‘Should I Choose A Fixed Or A Tracker Rate Mortgage?’ Here Is Your Answer.
Your Mortgage Adviser Does Not Know The Best Answer (And If They Say They Do They Are Lying)
Hindsight is a wonderful thing and who wouldn’t like to have their own time machine and be able to know how the future will look. Life is full of surprises and all too often the unlikely and quite frankly unbelievably ends up actually happening. Who would have thought that Leicester City would become Premier League champions? That Brad Pitt and Angelina Jolie would split? Or that America would be a leaked email away from electing Apprentice star Donald Trump to the Presidency?
At no point do I wish for that time machine more than when a client asks me ‘Should I Choose A Fixed Or A Tracker Rate Mortgage?’ because the only way to give the right answer would be to hop in and find out what is happening to interest rates in the future. Once our mythical time travelers had recovered from the shock of watching the celebrity couple ignominiously squabbling on TV (but enough of Donald and Hilary) the next thing that would amaze them would be just how low interest rates currently are. This would be especially true if they had arrived from 1989 when interest rates reached an eye-watering 15%
The most dramatic example of how a fixed or tracker rate can affect your finances can be seen by looking at those people lucky enough to still be holding lifetime tracker deals taken out before the credit crunch in 2007. These rates are only just above base rate meaning that some borrowers who took out a 0.19% above base rate deal with Woolwich, for example, are still paying an effective rate of 0.69%. By comparison, if you took out a 10 year long term fixed deal then you would only just be coming to the end of a rate of around 5% meaning that somebody with a £300,000 mortgage would have paid almost £130,000 of additional interest over the last 10 years.
This is not to say that the situation could not now be reversed and possibly anybody taking out a 10 year fixed rate today could look like a genius if interest rates were to increase much faster and sooner than we expect. But here is the thing, we just don’t know what is going to happen and anybody who says otherwise is lying or delusional or possesses a time machine, which is why any mortgage broker just hates being asked this question.
So the best that your mortgage adviser can do is to let you know what are the fundamental differences between a fixed and tracker rate so that you can make an informed choice. Here is a summary of the differences in a handy Infographic.