Choosing between a fixed-rate mortgage and a base-rate tracker "difficult"

Friday, 08 July 2011 12:38

Deciding whether to opt for a base-rate tracker mortgage or a potentially more costly fixed-rate deal is one of the biggest financial questions facing homeowners in the current economic climate.

With the majority of commentators predicting no change in the historic low bank rate of 0.5 per cent until at least next year, many people are taking a gamble on a tracker and hoping that their payments do not increase sharply in the coming months.

Recognising the right time to switch is tricky, especially as recent statistics from financial research company Defaqto showed that the difference between the average tracker mortgage interest rate and the base rate rose sharply from a low in autumn 2007 to a peak at the end of 2009, before starting to dip from February 2010.

David Black, Defaqto's insight analyst for Banking, said people who took out a base rate tracker at the end of 2007 made a "very astute" financial decision, as their payments have plummeted since.

However, the Bank of England's Monetary Policy Committee is bound to increase the base rate at some stage, Mr Black continued, but when and by how much are still unclear as yet.

"Unfortunately, those that make the wrong judgment are likely to find themselves significantly out of pocket," he commented. "Our analysis shows that while tracker margins have fallen since early 2010 they are still significantly higher than they were in 2007 before the credit-crunch - and this makes the decision-making process even more difficult for borrowers."

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