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For most of the last three years the mortgage conversation has had one shape. Rates had peaked, everyone was waiting for them to come down, and the only real question was how long to sit tight before the cuts arrived. People held off, took short fixes, or went onto a tracker on the reasonable assumption that the next move was downwards.
That assumption is no longer safe. In September the Bank of England held Bank Rate at 3.75% for the sixth time this year, but the vote was 6 to 3, with three members of the committee wanting an immediate increase to 4%. Inflation rose to 3.1% in August and the Bank expects it to climb further over the coming quarters. The next decision is on 5 November. The question has changed from when rates will fall to whether they will rise at all.
What you are actually choosing between
A tracker follows Bank Rate, usually at a set margin above it, so your payment moves when the Bank moves. That has been a comfortable place to sit while the expectation was for cuts. It is a less comfortable place if the committee's three dissenters turn into a majority, because the increase reaches your payment within weeks and there is nothing you can do about it except remortgage.
A fixed rate does the opposite. It fixes your payment for the term, whatever happens, and you pay for that in the rate. One thing worth understanding here is that lenders price fixed rates off swap rates, which already reflect what the market expects to happen. So fixing is not really a bet you win by predicting the future correctly. It is closer to insurance: you are paying a small amount to stop being exposed to an outcome you cannot control.
Which one suits you is mostly about you
Take Abel, 38, a fictional client whose position will be familiar to a lot of households. Her fix ends in January, she has two children at primary school, and the monthly budget has very little slack in it. For her, a payment that could move upwards twice in a year is not an interesting gamble, it is a problem. Certainty is worth paying something for, and the cheapest rate on the day is not the thing she is optimising for.
Someone else with the same mortgage might reach the opposite conclusion quite sensibly. If you expect to move within a couple of years, or you are due an inheritance or a bonus you plan to put against the balance, the flexibility of a tracker and its usually lighter early repayment charges can matter more than the certainty. The right answer depends on how much room your budget has and what you expect to do with the property, not on a forecast.
A few things are worth pinning down before you decide:
• The early repayment charges, and how they step down over the term
• Whether the deal is portable if you move, and on what conditions
• How much you can overpay each year without penalty
• The product fee, and whether paying it or adding it to the loan works out better
• How long you realistically expect to stay in the property
How long to fix for
If you do fix, the length is the second decision and it gets less attention than it deserves. A five year fix looks appealing when the risk is that rates rise, because it takes you past the period markets are worried about. It also commits you for five years, and if rates do fall you will be watching cheaper deals go past while an early repayment charge stands between you and them. A two year fix keeps your options open and puts you back in the market sooner, which is fine if you can live with the uncertainty of what you will find when you get there.
It is also worth comparing what your existing lender offers as a product transfer against the wider market. A transfer is quick and usually avoids a new affordability assessment, which matters if your circumstances have changed. It is not always the best deal available, though, and the convenience can be expensive over five years.
Nobody knows what happens on 5 November. Three of the nine committee members wanted a rise in September and six did not, which is a fair summary of how uncertain the picture is. Building a plan around a prediction is rarely wise. Building one around what your household could actually absorb if the prediction is wrong usually is.
In summary
The mortgage decision has not become harder so much as it has changed direction. For three years the risk sat with fixing too early. Now it sits at least as much with leaving your payment exposed. Fixing buys certainty and costs you something for it, tracking keeps your options open and hands the Bank of England a say in your monthly budget, and which of those you prefer depends on your circumstances rather than on anyone's forecast.
If your deal is coming to an end in the next six months and you are weighing up fixing against tracking, we can look at it with you properly, including what your existing lender is offering against the wider market. Give the ACJ team a call and we will talk it through.