Fixed or Tracker Mortgage….Why Not Both?

by Mark Johnston

Since the end of last year borrowers have been worrying about the news that the Bank of England Monetary Committee who are responsible for setting interest rates, believes that a substantial increase will be needed. Some experts have even predicted rates increasing tend fold back to normal levels of around 5%.

The news has been hard to take when millions of borrowers are already struggling, a massive rise in interest rates may push many families over the edge. Struggling home owners have been hit by the government cuts and many households are out of work because of the economic downturn.

With inflation levels at 3% and over and news of potential rises of up to 4% there is little chance that the current 0.5% base will remain. The Bank of England will come under pressure to increase interest rates to curb inflation. If they decide to increase rates up to “normalised” levels the base rate may go up to 5%. Those on tracker mortgages may find themselves paying up to 7.99%.

 Tracker customers are now looking for ways to protect themselves from such massive rate increases. The most obvious way would be to find a fixed rate mortgage but this is still a risk. There are still a lot of analysts who predict that the base rate will remain at 0.5% through 2011 or at least will remain very low. Fixed rate mortgage are more costly than tracker mortgages so borrowers could loose out if they fixed and mortgage rates remained at the same level.

So many borrowers have been finding it difficult to decide what is the best course of action. The good news is that many lenders are allowing borrowers to split their mortgage between a fixed and a tracker rate.

Richard Tolchard, senior mortgage manager at First Direct, says: “A small rise in interest rates can have a big impact on the family budget, so at a time when experts are divided over when interest rates will rise, it’s understandable that homeowners want to insure their future finances by fixing part of their borrowing while keeping the rest on a tracker.”

Although most lenders will allow their customers to move part of their balance to another mortgage deal. The only problem is that some providers offer good tracker mortgages whilst others provide good fixed rate mortgage, not all have good rates on both. The issue is that it has to be all with the same provider. No lender will allow a mortgage to be held with two different companies on the same property as both mortgage lenders would want ‘first charge’ on the house in case of repossession.

Splitting a mortgage in this way can have great benefits. Borrowers can protect themselves from base rate increases to some extent whilst enjoying the lower rates from tracker mortgage.

Although this represents a real option for many Ray Boulger at broker firm John Charcol doesn’t believe that this is the best way forwards. Mr Boulger said: “you are always going to be half wrong”. He’s confident that interest rates will remain low and that anyone on a good tracker should remain there at least for the time being.

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