Mortgage Clinic: 'Should we choose a fixed-rate or a tracker?'

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The Independent Online

'My wife and I are falling out over what to do with our home loan – a fixed rate or tracker? We're weeks away from our current deal ending (a two-year fixed rate on a £220,000 repayment loan) and I believe the Bank of England base rate will drop to 4 per cent over the next year. But my wife is arguing for the security of a fixed rate.' J Rangeworth, Bedfordshire

Our national obsession with house prices and interest rates has reached such a peak that it is getting to be a source of marital discomfort. It's a problem facing many UK households, as the credit crunch makes most lenders unwilling to cut fixed rates or trackers.

Your tussle is between the potential pay-off of a "gamble" on future lower rates and ever-cheaper monthly repayments, and the cost of a "safe", set monthly sum. The question is: can you afford to lose the gamble – and if so, by how much?

"Think about how comfortable you will be if rates were to increase," warns David Hollingworth at broker London & Country.

Take a typical base-rate tracker, offering between 0.2 and 0.3 percentage points above the Bank's rate. For every quarter-point rise or fall, each £100,000 slice of a tracker mortgage would mean roughly £15 on or off the monthly repayment.

Now let's take your £220,000 home loan: a whole percentage point fall on such a tracker would see a saving of £131 a month. Or, with the same size rate rise, an extra £131 a month to be found.

"If you feel comfortable with the ability to handle fluctuating payments, should rates begin to lift again, then a tracker is the obvious option," Mr Hollingworth says.

Despite their best efforts, highly paid City analysts ultimately don't know how high (or low) rates could go, so your guess is as good as any, although fluctuating economic data suggests further rate reductions.

It boils down to affordability: if there's enough room for manoeuvre within you and your wife's income to cope with any rises, then a tracker could tip the balance in your favour. But if you'd be in any way pushing your finances to the limit, then a fixed rate is the answer.

However, there is a solution for both of you, suggests Melanie Bien at broker Savills Private Finance: "Choose a tracker that lets you switch to a fixed rate at no penalty."

Lloyds TSB offers a two-year tracker at 0.18 per cent over the base rate (making it 5.43 per cent at the moment), she says, but it has a £1,995 fee.

Note also, she adds, that fixed-rate deals currently carry lower rates than trackers. For a £995 fee, Cumberland Building Society has a two-year fixed at 5.08 per cent.

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