What mortgage is best for me, fixed or tracker?
In recent times a base rate tracker would have saved you £100's on your mortgage if you were shrewd enough to get in when they were cheap, you would have been able to beat the banker (to a pulp).
How have thousands of us beaten the banker? Well mortgage trackers work by tracking the Bank of England base rate at a certain percentage above or below base rate. So for example, if you had a tracker of -1.50% your monthly payments would be calculated: Base rate - 1.50.
Back in the summer of 2008, it would not have been uncommon to find these types of products which could mean that many borrowers will be paying 8p per month on their mortgage right now. (See linked article).
Trackers are great when the market is on the way down. Predicting the falls are much more difficult, but in an economic downturn it can be slightly easier. The general indicators are deflation for a rate drop and inflation for a rate hike. But these indicators must be considered alongside other political, social and economic factors. Even then, its up to the Bank of England committee who meet up every month. There is a considerable level of skill and knowledge involved in predicting the market, if you feel you can manage the risk of payment rises then this may be the option for you.
Fixed mortgages on the other hand in a falling market can be very attractive. If you can fix your deal in for a long period of time at a rate you can comfortably afford, why take the risk? The average interest rate over the last 20 years has been 7.08% (not taking into account 2008-2009. Source: Countrywide Mortgages). Bearing this in mind, a 20 year fixed at 5% could be more worthwhile than a 2 year 4% tracker. Especially when you consider the arrangement fees you would have to add every few years for the next best rate.
What you have to remember is that rate changes are a roller-coaster ride, the ups and downs are to be expected. What you CAN predict however, is that now we are near the bottom of the dip, there is only one way to go from here. Whilst there may be slight reductions or a period of stability, trackers that exceed +2.00% over base rate are not attractive - because you will be right at the front of the roller-coaster (with your hands outside the carriage) when rates shoot up.
In the end the best advice would be to sit down with a mortgage consultant and get some advice based on your circumstances.
Failing this, you should follow these two basic rules:
- If you are the kind of person who works to a tight budget and wants no surprises – Fix it.
- If you are the kind of person who is willing to take a few risks; because you feel you can cover any payment rises – then opt for a tracker.
Interest Only or Repayment?
If you are purchasing a BTL property for investment as a project or to generally re-sell within a few years; an interest only option is a common choice.
Interest Only – Pay none of the capital and only interest back. The monthly repayment will be lower but you will always owe the outstanding mortgage at the end of the term. You are relying on property prices to rise or remain the same or an additional savings plan to repay the debt. This option will maximise cash flow on your rental income over the mortgage payments. This cash flow should be saved for repairs and any profit at the end of the year can be pocketed. It is a good idea to set up a maintenance fund with the extra cash over the mortgage. The importance of cash flow cannot be underestimated, when you build a portfolio your cash flow becomes the balance between success and failure. That could be the difference between a millionaire or bankruptcy.
Repayment – Pay both interest and a slice of capital back each month. The monthly repayment will be higher but you will repay the mortgage by the end of the term as long as you keep up the repayments. You also accumulate greater Equity in the property with the more that you pay off your mortgage.
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