How Much Would You Pay for Peace of Mind?

by Mark Johnston

Its a question that mortgage brokers and advisors hear on a daily basis “Should I take a variable or fixed rate mortgage”. Whether you’re a first time buyer or looking to move for a fourth time, everyone asks themselves the age old question.Deciding on a fixed rate or variable mortgage is a big deal and can have lasting effects on monthly payments and even a borrowers long term ability to afford their home loan.

Stay on a variable mortgage and the base rate may increase to a level that cannot be sustained. Monthly budgeting becomes impossible as interest rate changes means fluctuations in monthly repayments.

Move to a fixed rate mortgage and the amount paid per month will remain the same. But if interest rates remain the same for a sustained period, borrowers will be paying much more than they need to. Its always been a question of twist or stick?

The key measure is the Bank of England base rate which is set by the Monetary Policy Committee. The rate is currently at a 300 year low at 0.5%. Many believe that this rate will stay for a number of years until the UK economy starts to fully recover from the financial crisis. Analysts believe that any short of sharp rise in interest rates is a slim possibility at the moment. This view is re-enforced by the recent comments made by Mervyn King, the governor of the Bank of England.

That said, given the current rate of interest, it does seem more than likely that any movement will be up rather than down, the question is, when?

Accord Mortgages are offering a 5 year fixed rate mortgage for 4.09%. Throughout the mid to late naughties (2004 to 2008) the bank of England base rate was around 5% so if the base rate reverted to this historic level and you had taken the Accord mortgage you would be saving money.

Accord also offer a tracker mortgage which is currently 2.44%. That’s 1.94% above base rate. If interest rates rose to the 5% mark, the interest rate would rise to 6.94%.

Comparing the two on a 25 year £100,000 mortgage would result in the fixed rate mortgage at 4.09% costing £532, whilst the tracker mortgage at 6.94% would cost £702. If interest rates were to rise to this level on these deals a fixed rate mortgage would save a staggering £170 per month.

But what if the base rate remains the same? Using the same example, the fixed rate would still cost £532 whilst the tracker at 2.44% would only cost £445. Anyone tied into a fixed rate mortgage would be paying almost £90 more than they need. But if you look at a fixed rate as an insurance policy against future price increases then the £90 a month for peace of mind might seem worthwhile.

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