Fixed rates versus tracker

However, there is also an argument to suggest that we have arrived at the peak of rate rises and, if there is any movement at all, it will be downwards.

“This could be an indication that rates are as high as they are going to get,” says Louise Cuming, head of mortgages at Moneysupermarket.com. But she adds that the only certainty is uncertainty. “Let’s face it – even the people who run our economy don’t know what rates are going to do, so any action borrowers take on this basis has got to be a gamble.”

Fixed and variable; an unusual level playing field

Traditionally, fixed rates are priced at a premium to variable rates as the lender factors in the cost of its borrowing going up over the fixed rate term. However change is afoot: “In the last 18 months, this premium traditionally associated with fixed rates has eroded and now they are fairly equally priced with variable rate deals,” says Lisa Taylor, researcher at Moneyfacts.

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For example, Scarborough Building Society has a two-year fixed rate mortgage priced at 4.94 per cent. This gives a monthly payment of £755.43 on a 25-year repayment mortgage of £130,000.

By contrast, Catholic Building Society currently has a leading two-year discount mortgage priced at 4.9 per cent making a monthly payment of £752.41. Like for like – and just in terms of rate – the variable deal currently provides marginally better value over the term. But today’s rate rise means that, so long as the Catholic mirrors it exactly, the mortgage could then cost £771.37 and thus the fixed rate will come out on top in terms of value.

You can keep track with a tracker

But, regardless of the sums, borrowers should only even consider taking a variable rate if they are able to afford a potential hike in payments.

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“Even if this is the case, you should still always opt for a deal that tracks the Bank of England base rate rather than one that is discounted from the lender’s Standard Variable Rate (SVR),” says Cuming.

“This way, if base rate goes up by a quarter of a point, you know that the rate you pay will follow exactly. With discounted deals, some lenders use a rate rise to make a profit by hiking their SVR up to and beyond the rise in base rate.”

Looking beyond the rate

When choosing the best tracker compared to the best fixed rate, you will need to look beyond the level of interest charged as upfront fees are as high as they have ever been.

“Lenders are so acute about the marketing of their mortgages now,” explains Cuming. “They want to get into the best buy tables with the lowest headline rate, but they’ll load a high arrangement fee onto the deal instead and suddenly it’s not such good value after all.”

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Fixed rates deals tend to come with the heaviest fees. “The lender must factor into the cost upfront the prospect of interest rates rising, whereas if the base rate goes up with a tracker you pay for it immediately,” explains James Cotton, mortgage manager at broker, London & Country.

For example, National Counties Building Society’s five-year tracker (which at 0.1 per cent below base, is priced at 5.24 per cent) charges a £395 arrangement fee, while Derbyshire’s similarly-priced five-year fix of 5.1 per cent comes with a fee of £999. So, even where a fixed rate deal looks cheaper in terms of its rate, it may actually cost you more during the course of the deal.

Factoring in fantastic fees

Borrowers should be especially wary of arrangement fees that charge a percentage of the loan instead of a fixed cost. This type of charging structure – one which can cost the borrower thousands of pounds – is increasingly employed by lenders to counteract very low interest rates, says Cotton.

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“These days, the mantra on all types of mortgage is ‘the lower the rate, the higher the fee’. But a deal with a higher rate and fixed arrangement fee can still provide better value than a low rate with a percentage-based fee.”

For example, take Scarborough Building Society’s 4.94 per cent two-year fixed rate deal. The monthly repayments on a £100,000 mortgage amount to £581.10. Add the fixed £995 arrangement fee to the loan, and you have a total spend of £14,941 over two years.

Cheltenham & Gloucester’s ‘cheaper’ fixed rate deal priced at 4.49 per cent means a lower monthly repayment of £555.27 on the same £100,000 mortgage. But when you factor in the 2.5 per cent arrangement fee (£2,500 on £100,000), the actual amount repaid over the two years becomes £15,826. “Therefore the fixed rate deal with the lower rate will actually cost you £885 more over the term,” says Cotton.

Keeping your choice for the long term

The types of deals least likely to charge the infamous percentage-based fee are long-term base rate trackers. Many are totally fee-free and do not come with any tie-ins or early-repayment charges.

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What’s more, borrowers can avoid paying remortgage costs every two or three years that, according to Andy Gray, head of mortgages at the Woolwich, ‘are only likely to creep up further in price’.

He says: “We have a lifetime tracker priced at 0.18 above base (current pay rate 5.43 per cent) that comes with no early repayment charges or upfront fees. As well as a competitive rate in the long-term, this provides total flexibility and transparency for the consumer.”

Even if you opt for a fix, long-term value still applies. “Money markets have pushed up the cost of short-term fixes so they are not as competitive as they were around two years ago while longer-term deals are now offering better value,” says Gray. “An increasing number of people are tired of switching products every few years and are looking for a simple competitive rate for the term of the mortgage.”

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This is especially true given the minefield of options in today’s mortgage market. Northern Rock for example has four different pricing structures across 136 different fixed rate mortgage products that account for rate, fee, term and loan to value (LTV), says Cotton, which is why he claims a mortgage broker can represent an increasingly valuable service.

Personal circumstances

But when choosing between a fixed and a tracker deal, it’s crucial to remember that cost is just one part of the decision-making process. “Choices should start with your own circumstances and whether you can afford to take a gamble on rates rising at all,” says Cuming.

According to the Council of Mortgage Lenders (CML), most people feel they can’t. The most recent statistics show that 72 per cent of UK homeowners are on fixed rate deals – “although the vast majority of these are on deals of between one and three years, so they will still be looking at remortgaging frequently,” says CML spokesperson, Bernard Clarke.

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