Tracker or fixed rate? Mortgage dilemma

Over one million fixed-rate mortgage deals will expire in 2008 and with falling interest rates, remortgagers are facing the choice of tracker or fixed rate.

Currently 65 per cent of borrowers opt for a fixed-rate mortgage deal, while 35 per cent choose tracker and variable rate deals.

However, figures from Spicerhaart Financial Services (SFS) reveal a 350 per cent increase in the popularity of tracker mortgages over the last year.

"Consumers rightly predicted interest rates were set to fall, and switched to variable products accordingly. It is clear borrowers believe another cut, to match the 0.25 per cent in December, is imminent," said Steve Cox, operations director of SFS.

"It is highly unlikely interest rates will rise this year, so people are choosing to capitalise on this and ride out 2008, rather than lock themselves into anything."

Despite this optimism, opting for a fixed-rate mortgage in the current environment is still worth considering.

Nici Audhlam-Gardiner, head of Abbey Mortgages, is advising new borrowers and remortgagers "to think twice" about tracker mortgages, as the lower rates now have to balanced against future security.

"For those trying to get onto the property ladder, the temptation will be to hold out a little longer to see whether this big decision becomes more affordable in future months.

"While tracker rates are looking a little more affordable than fixed rates from most lenders, the decision to take out a tracker should only be made if borrowers are confident that they could withstand a further increase in rates, which is not out of the question over the next two years."

She added there were some excellent fixed-rate deals on the market and they would be the preferred option for more cautious borrowers until a downward trend in the base rate is seen.

Stephen Leonard, director of mortgages at Alliance & Leicester, is also advising first-time buyers to consider fixed-rate deals.

"First-time buyers looking for a mortgage deal should consider taking out a fixed-rate mortgage which will give them the security of fixed monthly payments.

"A tracker mortgage is a good option for homeowners who are financially flexible and looking to take advantage of any further interest rate cuts during the next 12 months," he said.

However, Andrew Montlake, partner at independent mortgage broker Cobalt Capital, is leaning toward tracker mortgages.

"Our advice to borrowers remains very much the same: tracker mortgages are by far the most attractive proposition in 2008," he said.

"The precarious state of the housing market, coupled with ongoing fall-out from the credit crunch, means rates are still likely to come down two or three times during 2008."

He added: "If your mortgage is tracking the Bank of England base rate, you will instantly be onto a winner.

"Given it will be some time before fixed-rate products become competitive again, and that lenders, in the current market, are unlikely to pass on rate reductions in full to those on standard variable rates (SVRs), the clever money is very much on tracker products."

For homeowners on a lender's SVR, David Kuo, head of personal finance at Fool.co.uk, is advising remortgaging to a tracker mortgage.

He said: "Homeowners on lenders' SVRs should take active steps to switch to tracker-rate mortgages.

"Changing from a typical SVR of seven per cent to a tracker rate of 5.5 per cent can slash repayments on a 25-year, £200,000 mortgage by £185 a month.

"When times get tough, the tough get going and homeowners need to get moving too. They need to use their guile to help themselves rather than rely on the empty gestures of politicians."

While the remortgaging seems to be grabbing the headlines with current higher interest rates, research by mform.co.uk shows 40 per cent of mortgage customers have never changed lender.

Eamonn Rice, chief Executive of mform, said: "We’d urge customers to review their current mortgage deal and focus on the true cost taking into account fees and the monthly payments.

"It is possible to make substantial savings as rates fall."