Okay chaps and chapettes, put your adult faces on... I’m in the process of organising a mortgage as I’ve decided to do the grown up thing and buy a house. Here, in the UK, peeps in the housing market are saying now is a sweet time to buy and to start hammering away on a mortgage. Now, I’m having a bit of a dilemma regarding the type of mortgage to go for... Basically should I opt for fixed rate or a tracker deal? With a fixed rate mortgage I know exactly how much money I’m paying each month and if interest rates go up I’m laughing, but if they go down (which admittedly is unlikely given the current financial climate) I could lose out a fair bit. Now, with a tracker mortgage payments can go up or down or stay the same depending on what the banks do. If interest rates are low then it’s all cool and the gang as my payments are down, if they shoot up I could find myself in trouble... My mortgage advisor is suggesting a fixed rate mortgage as I’m a first timer, but with that comes how long do I fix for? 2 years might not be enough time for rates to do anything and 5 years sounds like a long, long time, but it is long enough for rates to increase. I know there are risks and bonuses with both types and currently most of my friends with mortgages say go for fixed and I know that it mostly depends on personal situations, but, as I barely know the price of milk so I figured I’d ask the forum what they went for and why? Did you lose out or bank a wedge? Pros? Cons? Mehs? Thanks all.
In order to make an informed decision you would need a crystal ball. In the absence of that, it's a gamble either way. (I have a mortgage too.) If you are sure you can afford the fixed rate, it's your safe option. You may cringe if rates drop, but you will be no worse off then what you signed up for. Bear in mind that rates will never drop below a certain level, but their capacity to rise is great. (At least it will seem like it!) In times of instability it's probably safer to go fixed. I don't know about your reserve bank/treasury, but in Aust, the first thing the Reserve Bank does when the economy improves is raise interest rates. Mine is currently variable, not rising at the moment. The GFC probably did me a favour there
First and foremost, something I need to state for compliance reasons: although I am authorised and regulated by the Financial Services Authority in respect of issuing personal financial advice, the following post should NOT be taken as advice, just general information for discussion purposes. If you are in doubt, please seek advice from an Independent Financial Adviser before proceeding with any major financial transactions. Anyway, a lot of what you've asked depends on exactly what you're being offered and what level of equity you are planning on retaining in the property. For example, if you are borrowing 90% of the property value you are likely to get a terrible deal no matter what you do, therefore you need to work out if you will be able to reduce the Loan to Value rate over the next couple of years: if so, you need the flexibility to make overpayments or to remortgage onto a better rate without having to worry about penalty charges. At 80% the next major price break is at 60%, and the gap between rates isn't as large, therefore you can afford to look to fix your rate for longer. Another consideration is how affordable the quotes are. If you take a tracker rate you need to look at the Key Facts Illustration for the mortgage where it shows the amount of extra interest you'll need to pay if the rate rises: if this takes the mortgage outside what you can realistically afford, you really must consider fixing the rate at an affordable level. Current thoughts seem to indicate that we can expect one base rate rise this year, probably sooner rather than later (a seminar I was at recently contained the estimate of a 0.25% rise in May) and then two more next year, but opinions vary wildly and can be revised very quickly if economic circumstances change. If you believe that, then a 2 year fix is unlikely to have major advantages over a tracker rate, however you don't fix solely because of what is most likely to happen, you fix because of what might realistically happen. Ultimately it's a very personal decision, with some people choosing the lower initial rates and others choosing to hedge with a fix for varying terms.
Now, I'm no expert (and that's no understatement), but I've always considered it thus: if you're on fixed, you know exactly how much they're gonna shaft you each month. If you're on tracker, you don't. For me, that feels like an unnecessary risk and I'd need to be very confident of coming out ahead (and significantly so) to consider a tracker.
I had a fixed rate just for the stability. That lapsed and I went onto the basic variable tracking the bank of england rate. Just when the rates went down! Hurrah for me! Just recently re-mortaged and luckily I was able to keep my existing balance as variable (and take adavantage of the current low rates) while getting a fixed one for the top up I needed to get the next house (and so get some sort of monthly stability too). But in truth...I know nothing. Less than nothing. So I'd advise...make a choice and then don't regret it or look around at what could have been. Just enjoy your new abode. If it's fixed rate shop around when it runs out but I feel the more you look into it the more you can get obsessed with getting it just right and it can become pretty stressful.
claim squatters rights and live in the prems for 20years where it'll then become yours ? On serious note, I been on a fixed rate. Property value was then raised (it has since dropped but still higher than before). If I was on a tracker I would be proper broke now, so I've been lucky. Compared to other people I know who been on tracker and prices went up and they couldnt afford the payments. Its a 50/50, as said above anything can happen with these things and the pros and cons for both choices are just as bad as each other.
Thanks everyone, I really appreciate the replies. The whole thing is doing my head in and it's a terrible waste of money if I make the "wrong choice". A work colleague opted to fix when he remortgaged only for the base rate to drop to its lowest the following month. However, without a crystal ball or flux capacitor we can't know for sure what is going to happen... You've given me a lot to think about... Thanks.
Osu, Hummmmm, when was the last time a RE guy did not say it was the right time to buy? I don't know about the UK market, so I'll leave that decision to you. For the rates: In today's environment, I'd opt for fixed rates for as long as you can obtain & a mortgage for the longest duration as well... Chances are you'll be able to repay most of it with devalued pounds, or dollars, or Euros, or whatever toilet paper they use at that moment. osU!
I laugh when I see the word "fixed mortgage" down here in Australia. Yes, they will fix it for 5 years. I am used to seeing 25 or 30 year fixed mortgages in the US. If rates are historically low, which I believe they are currently, grab a "fixed" mortgage. Like others state here, it is good to know what you are going to pay for budgeting purposes. If you are planning on flipping the property within a couple of years, the tracked mortgage can be cheaper, but then flipping is speculation isn't it?
After speaking to the mortgage advisor and seeking advice from those with mortgages I decided to go fixed rate. That way I know exactly what I am shelling out each month and I'll be able to plan the rest of my finances (particularly savings for the future) against it. It's a minefield out there - fixed, tracker, short term, long term, insurances, wills, surveyance, solicitors, offers, contracts, old build, new build, local amenities, local schools, ofsted, previous owners, *gasp*... Still, all part of the final steps towards real life adulthood... Oh and thanks Rhea for fixing my multi-posts - I posted from my phone, realised it had posted three times, couldn't delete the additionals, tried to logon with my iPad 2, couldn't remember my password, got locked out, and by then you had fixed it...
