Fixed or Tracker?

Posted on 8 June 2010 by Andy Wilkinson


We are coming to the end of a fixed 2 year deal with Nationwide (end of August) having been caught out by having a fixed deal just as all the rates dropped like a stone.  I would like to know if fixed is the way to go (long or short term?) or would a tracker be better?

Andy

Who better to ask than our own Ray Boulger.  Here is Ray's response for you:

I would suggest you do nothing to change your mortgage when you come to the end of your fixed rate because you will revert to Nationwide’s old SVR (it calls it Base Mortgage Rate), which has a lifetime cap of 2% over Bank Rate. This means your interest rate will fall to 2.5%, you will incur no costs and will no longer have any early repayment charges (ERC). This rate is in line with the cheapest new trackers on the market and in fact cheaper than any deal currently available if you have less than 30% equity in your property.

Although fixed rates have fallen recently, making them more attractive than they have been for quite a while, all the indications are that the economy is in such a mess that Bank Rate will have to remain very low (not necessarily at 0.5%) for at least 2 or 3 years. Therefore if you don’t need the security of payment offered by a fixed rate but are making the judgement on the basis of which type of mortgage you expect to be cheaper over the next year or two Nationwide’s SVR is ideal.

Unless you have any other more expensive borrowings, in which case you should use the money you will save from the fall in your mortgage payments to pay off those debts first, you could take advantage of the lower interest rate by overpaying on your mortgage. Once you are on Nationwide’s SVR you can overpay as much as you like without incurring an ERC. If you do this it will mitigate the pain when interest rates rise as you will only be paying the higher rate on a smaller mortgage balance.

You will need to keep a close eye on the market as at some time in the future it will almost certainly be right to switch to a fixed rate, although at the moment it is difficult to know when that will be, but probably not this year. If you have spoken to a John Charcol consultant and provided details of your requirements one of the services we offer is that we will contact you when we think it is right to think about switching to a fixed rate.

Ray

Answers provided in response to Ask the experts are based on the information provided and do not constitute advice under the Financial Services & Markets Act. They reflect the personal views of the authors and do not necessarily represent the views, positions, strategies or opinions of John Charcol. All comments are made in good faith, and John Charcol will not accept liability for them.

We recommend you seek professional advice with regard to any of these topics where appropriate.

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