Remortgaging: Fix or tracker?
Wednesday, 05 August 2009 05:10
Remortgaging fell 63 per cent in May compared to the previous year, according to the latest figures from the Council of Mortgage Lending (CML), as the combination of shrinking equity and increasingly attractive standard variable rates (SVRs) persuaded many that doing nothing was the best option.
With SVRs for existing customers at several bank and building societies tied to the historically low base rate, the low rate of remortgaging shows many customers have been content to put off tying themselves into a new deal.
But while the base rate may remain stable into next year, mortgage deals will not stand still. Sarah Routledge considers the options for borrowers who are looking to lock in again.
Tracker
After the base rate fell spectacularly to its current 0.5 per cent, trackers gained a new popularity with some fortunate borrowers paying just pennies for their loan. But this led to a speedy withdrawal of new products.
According to Moneysupermarket.com, there were 522 one-year tracker products available on July 1st 2008 - by the 20th July 2009, there were just two available, a fall of 99.6 per cent.
Over the same period the number of two and three-year tracker deals fell by 74 per cent and 73 per cent respectively.
Although this lack of choice is not ideal, don't discount tracker mortgages, Louise Cuming from Moneysupermarket.com says: "For consumers looking for a new mortgage, the near entire absence of tracker products shouldn't put you off looking around for them; the trackers that are still available are generally much cheaper than the equivalent fixed rate deals.
She adds: "The decision between a tracker and a fixed rate is always somewhat of a gamble, and whilst some people like the certainty a fixed rate mortgage affords, the savings on offer from tracker mortgages are hard to ignore.
"Almost everyone agrees that the base rate must eventually rise, but no one knows quite when this will happen, and if rates remain flat for another six months or so, those opting for tracker may save hundreds of pounds."
Ray Boulger, of mortgage adviser John Charcol, says the security offered by fixed rates means they will remain popular for most people.
"However, we are recommending trackers to more clients this month, with the focus on low or no early repayment charges (ERCs) as well as the obvious requirements of a good rate and fee combination and possibly an offset facility," he adds.
"The reason the size of the ERC is important, unless the mortgage offers a droplock option, is that many clients will want to consider switching to a fix when the time is right for them."
HSBC is offering a 75 per cent loan-to-value (LTV) tracker mortgage, which is currently at 2.95 per cent, with a £799 booking fee. There are no early redemption penalties, so once the rate moves up the borrower is free to renegotiate.
Fixed
However, once the interest rate moves up it may be too late to secure a fixed rate at the lower rates currently available.
"If you are on a high SVR then you should fix, and you should probably get on with it because fixes are moving up," advises Mark Harris, managing director of Savills Private Finance.
"There is not much to deliberate on - if you think fixed rates will get cheaper then you are kidding yourself."
But he adds, "It's a harder dynamic if your SVR is more like 2.5 per cent. For those on a low SVR, it is a dilemma - I would probably sit on the SVR but watch it carefully."
This is where a good mortgage broker can help, Mr Harris says, as they can track the market and keep you updated.
Then when you feel the time is right, you can choose a new deal.
Darren Cook, from Moneyfacts, says searches on the site suggest fixed-rate deals are more popular as people try to take advantage of low rates for the medium term.
Currently, the best fixed-rate deals around are for two-year terms, he adds.
NatWest is offering a two-year fix at 3.69 per cent, at 75 per cent LTV, with a £799 booking fee.
"It's still the case that the premium deals are only available at 75 per cent," says Mr Cook.
However, HSBC is offering a 90 per cent LTV mortgage at 5.99 per cent, fixed for two years, with a fee of £599.
"In contrast, if you look at five-year fixed-rate deals, the best is at Chelsea Building Society at 4.8 per cent, fixed until 31st August 2014, with a fee of £995 - and you need a deposit of 35 per cent," Mr Cook says.
Remortgaging to move
While many remortgage to get the best deal, or get some certainty over their monthly payments, there are many others who would like to but cannot - because they are in negative equity.
This can be particularly serious if you need to move house. However, your current bank may be able to help out. Customers of Nationwide can 'carry over' some of their negative equity, provided they are willing to put down at least a five per cent deposit on the new property.
Essentially, this will mean the loan-to-value on the new property could be up 125 per cent. While it is not ideal to be in negative equity, flexibility from banks will help out those who need to move house, but who otherwise would be stuck.
Although Nationwide is the only bank so far to make this an official policy, other banks are offering similar deals 'under the counter' according to industry insiders, so it may be worth approaching your own bank first if this is the case.
Comments
Newsletter sign up