There are 5 key factors every mortgage buyer should consider before deciding between a Tracker or Fixed Rate mortgage.
1 The Different Rates between the Fixed and Tracker mortgage product
Once the deposit and the affordability, and the loan to ratio has been calculated; you can analyse the difference between a Fixed and –
a tracker as a direct comparison with each other. In general, the tracker rates should most likely be lower than a fixed term mortgage. The product fees may vary from lender to lender, but the tracker rates will seem to be more attractive?
The chart below shows two different lenders with the exact same product fees based on a. £200,000 property valuation.
Therefore, a direct comparison can be conducted to check for the monthly difference you can save for the period.
For the 2-year term, the 60%, 75% and 85% loan to ratio has savings of £17, £24 and £43 a month on a tracker rate mortgage respectively.This analysis shows that a higher loan amount would contribute to a larger gap between the two types of mortgage.
2 Can you accept a rate increase within the tie in period of a Tracker Product?
Another perspective for consideration is the potential increase in interest rates during the mortgage. If a buyer is considering between a tracker or a fixed rate mortgage, the person should think about his or her acceptance of risk on the difference between the two rates. For example, the buyer accepting a tracker rate at 60% LTR will have 0.32% difference between the Fixed and Tracker rate mortgages.
During the 2 years term, if the Bank of England rates stay below or under 0.32%, the buyer will still be saving each month. However, if the Bank of England rates increases more than 0.32%, then the tracker monthly payments would be more than the fixed rate mortgages.
Let us apply this to the remainder of the term left. If you are at month 22 of a 24 months term then the final two months might not make a huge difference. However, if you are on month 22 of a 60 month mortgage (tie in period), then perhaps you are exposing yourself to higher interest rates for the remainder of the period. Which of course means you have to pay more.
3. Understand Product Fee and Cost!
It is my job as a mortgage broker to examine the direct comparison of rates between different lenders or even the same existing provider. However, the buyer should still check the details on product fees in detail. Lower more attractive rates most likely are on a higher product fee which needs to be paid up front or included in the overall mortgage borrowing amount. For a detailed calculation, you should seek a mortgage specialist for a breakdown calculation on the cost. Never assume a lower rate is always cheaper until the final product fee is accounted for. Always beware of headline rates these are to draw the public in always request a mortgage broker to examine the mortgage product in detail.
4. Will you overpay during the term time?
If you are a saver and confident you may have spare savings or additional cash during the term of the mortgage, then you should look at the overpayment allowance for the duration of the agreed period. For a rule of thumb, most high street Fixed rate mortgages do allow a maximum overpayment of 10% of the agreed loan amount during the term period. Alternatively, the Tracker rate mortgage generally have a more generous overpayment amount. For the detailed calculations, you should seek a mortgage specialist for a breakdown calculation on the overall cost.
5. Watch out for the Loan to Ratio percentage
For existing homeowners who are considering re-mortgaging your existing
residential, home, you should be aware
of your loan to ratio figure. Mortgage providers use a base index to obtain the
valuation of your home. Your home valuation may fall between the Loan to Ratio
envelope at 65% and 60% or 90% and 85% etc. The difference can be significant,
and the comparison may need to be recalculated again.
As we speak at the moment (April 23rd 2020) desktop valuing or AVM’s go
up to 60% (LTV, loan to value) above this figure lenders are reluctant to send
surveyors out to the property unless it is empty. (Which of course is totally understandable).
Please check out my previous article about tracker and fixed term mortgages
you might find it useful.
If you would like a free chat about your circumstances and a
professional recommendation on a mortgage or bridging product to suit your
needs, call Paul on 01902 213201