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Twist or stick? David Carmichael, Taylor Carmichael

Twist or stick?

Only in the present mortgage marketplace can mortgage brokers use the analogy of playing cards with choosing a mortgage rate, and be justified in doing so.

With the recent emergency budget calling into question our former government’s economic growth forecasts for the next year or two, many industry experts are now predicting that base rate will remain stable at around 0.5% until as far away as the end of 2012.

This view carries some weight in the financial sector, as our Chancellor, George Osborne, made reference in his budget speech to Bank of England governor Mervyn King’s recent comments, that if growth does prove to be slower, interest rates will remain lower.

So for those of us thinking of buying a new home or re-mortgaging, where does this leave us over the next couple of years?

Do we acknowledge that UK wide many mortgage specialists are reporting increased enquiries and bookings for fixed rate mortgages, or do we take comfort that, setting aside all the economic gloom and talk of double dip recession’s, at least we will have the option of low tracker rate mortgage products for a couple more years, and with it the cheap payments they bring?

In reality what therefore are our choices?

We can ‘stick’ and by doing so take a competitive fixed rate (75% example- A&L 3.15% to 31/07/12). With this comes peace of mind, an ability to budget, and of course the borrower becomes less reliant on choosing which politician or economist they should believe in the months ahead. The downside is of course to ‘buy’ this guarantee means often giving up a low standard variable rate (SVR) or turning a blind eye to a tempting tracker rate linked to the Bank of England base rate.

For those more risk-averse borrowers who simply need or like to know what they are paying, who prefer to have a planned budget, and who are weary of all the speculation, a fixed rate is a highly attractive option.

In contrast if you choose to embrace the prediction of a continued low base rate, in the short to medium term certainly there are some competitive choices, (75% example-Accord 2.04% over base to 01/08/12) and of course many borrowers can remain on a low SVR until they see signs of an upward trend. Such a strategy of course brings with it an increased risk - a risk that lenders often exclude existing borrowers from their best products, and of course in a difficult market, lenders will be very likely to pre-empt rises more quickly than consumers and increase rates at regular intervals.

In terms of risk and reward, those who choose to ‘twist’ and choose a tracker rate must avoid a ‘twist’ and ‘bust’ scenario, and must look carefully at their personal circumstances, and future affordability. For those who are able to plan ahead, setting aside the immediate savings now to combat any future rises can be hugely effective, although as pressure on consumer earnings now engulfs the public as well as private sectors, it is not always easy to be prudent in challenging times.

Even for the most experienced broker, there remains no right or wrong answer. Choosing a new rate in an ever-changing market is to an extent an educated ‘gamble’ and each household will have different aspirations and goals. What is good for you and your family, may be entirely different to what is best for your neighbours or friends.

David Carmichael

David Carmichael has been providing ‘Independent’ mortgage advice within the UK marketplace for over 18 years. A married man with three children, he recently co-launched ‘Taylor Carmichael Financial Services’ providing bespoke mortgage advice to a broad spectrum of UK wide clients. www.taylorcarmichael.co.uk

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