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Ask Justin

Ask Justin

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Fixed or tracker mortgage for 2 years?

Borrowing | Mortgage Helpful? 5

Asked by hchan22, submitted 27 November 2009.

Open Quote Do you think Bank of England Base Rate will remain at its present level for some time? If so should I opt for a 2 year base rate tracker mortgage? End Quote

Answered by Justin on 28 November 2009

At the risk of being totally wrong, I think there’s little chance of the Bank of England significantly raising interest rates over the next couple of years.

The two biggest factors influencing the Bank’s interest rate decisions appear to be inflation and the state of the UK economy. In times of high inflation the bank often raises interest rates in an attempt to discourage spending (it becomes more expensive to borrow money and more attractive to save), which in turn can help reduce inflation. Conversely, when our economy struggles the Bank usually reduces rates to encourage us all to spend more, thereby boosting the economy.

Right now our economy is struggling and I don’t personally see things improving that much over the next two years. If this is the case then pressure will remain on the Bank of England to keep interest rates around the present level.

There is a risk of rising inflation, but I think this is more likely to come from rising oil prices than us spending more and generally pushing up prices (so raising interest rates would be less effective at fighting inflation). In any case, despite the Government/Bank of England pumping billions of Pounds into our economy it’s made little difference to inflation so far.

Legal & General carries out a monthly market predictions survey (called ‘Fundamentals’) across a range of financial institutions. The latest edition shows the average predicted Base Rate at the end of 2010 as 1.25%.

The lowest two year mortgage rates currently seem to be around 3.65% fixed and 2.69% (Base Rate plus 2.19%) for a tracker. Not a big difference, but if the tracker rate remains unchanged you’d save £2,880 of interest payments compared to the fixed on a £150,000 mortgage over two years.

You can try out various interest rate scenarios using the Candid Money Fixed vs Variable Mortgage Calclator.

If you’d struggle to cope with rising mortgage payments then a fixed rate could still make sense. It may end up being more expensive, but you’ll have the peace of mind that you can afford your mortgage payments over the fixed period whatever happens to interest rates.

Otherwise I think a tracker mortgage could be worth the gamble. But remember, the decision is just that, a gamble.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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