The Right Time to Choose a Fixed Rate Mortgage?
Sunday, February 1, 2009
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Anyone who has taken out and remains on a tracker mortgage at the moment must be laughing. For all the doom and gloom that the credit crunch and subsequent recession has brought to the UK, the fact is those homeowners with a tracker mortgage have seen their monthly repayments plummet in unison with the Bank of England base rate. That figure has been slashed to an incredibly low 1% in the space of a few months, down from a massive 5.75% just a year ago.
Just to show what a difference this makes, let’s take someone with a £125,000 mortgage over 25 years, tracking 1% above last February’s base rate (6.75%). Last year their monthly repayment would have been approximately £874. With the base rate now at just 1%, their monthly repayments have been reduced to just £534. And there are even some people who’s tracker mortgage tracks below the base rate, meaning that some borrowers such as those with a £200,000 interest only mortgage with Cheltenham and Gloucester are paying just 16 pence – and only that amount because the bank’s computers can’t allow customers to pay 0%.
So it’s safe to say that there are some very happy people out there. But the fact is that interest rates can’t go down much more – and what goes down must come up. The base rate will rise when the economy begins to recover and those smiling tracker mortgage holders will begin to lose that warm fuzzy feeling emanating from their wallet. So is it time to grab a decent fixed rate mortgage? It may well be.
Alliance and Leicester offer fixed rate mortgages at an APR of 5.3% (fixed at 4.89%), for example, and could be a good bet seeing as many in the industry expect the worst of the recession to be over by 2010 and rates to rise by 2011. Should they rise to the levels they were at last February, with the same parameters as used in the example above, this mortgage would have a monthly repayment of around £731. Which is still a good saving on our first figure of £874. It is difficult to predict exactly what will happen, but part of any mortgage decision is a gamble – keep an eye on the market to stack the odds in your favour.
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