Mortgage market blooms

Tracker or fixed rate? Luckily, there are lots to choose from
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The Independent Online

February marked the first fall in house prices for nine months which could tempt more borrowers to consider moving or buying a home. The 1 per cent decline in prices over the previous month's figures was due to special factors, such as the bad weather and the expiry of the holiday on stamp duty, according to the Nationwide.

Banks and building societies are expected to gear up their lending. Last week First Direct launched a Life Tracker available to anyone with a deposit of at least 15 per cent. Meanwhile, Halifax introduced a 21-month fixed-rate mortgage, to celebrate 21 years since it first launched a fixed rate. The Post Office has also been busy expanding its mortgage range and cutting rates.

Choosing between fixed and tracker deals isn't just simply a process of looking at the interest rates but about predicting how they will move in the future. So if you think interest rates will rise soon, then you would probably pick a fixed rate, to avoid facing an increase in your monthly mortgage charges. On the other hand, if you believe rates will languish at their present low levels, then you could be better off with a tracker.

First Direct's offering looks reasonably attractive at the moment. The Life Tracker if you have a 15 per cent deposit is 3.49 per cent above base, producing a 3.99 per cent rate at the moment. With a larger 35 per cent deposit, you can get 1.89 per cent above base – working out at 2.39 per cent.

However if rates did rise, that would soon look less attractive, which is where the gamble comes in. "Lifetime trackers are good if the margin is competitive and there are no early repayment charges – our clients love the flexibility," says Melanie Bien, director at the independent mortgage broker Savills Private Finance. "Some trackers have early repayment charges for the first couple of years; others none at all, which means it's important to check terms and conditions."

To its credit, the First Direct deal has no early repayment charges. "The lack of an early repayment charge is important if interest rates rise – and the borrower decides they want to get out of it," Bien points out. "However, the reason borrowers mostly opt for lifetime trackers is so that they don't have to keep remortgaging every few years – saving money and hassle."

For first-time buyers, a tracker may not be the best option, she says. "People taking out their first mortgage are usually on a tight budget and need the certainty of knowing how much their mortgage repayment is going to be in the months ahead," says Bien. That's backed up by figures from the Council of Mortgage Lenders, which show that last year 68 per cent of new mortgage lending was on a fixed rate.

Another aspect of the First Direct deal is the ability to make overpayments, says Andrew Hagger, mortgage analyst at "Many people now aim to be mortgage free as soon as finances allow, using bonus payments for example to reduce the length of their mortgage life sentence."

Explaining the launch of Halifax's 21-month fixed rate Stephen Noakes, a mortgages director at the bank, says: "Ever since their introduction 21 years ago, fixed-rate mortgages have been fundamental for homeowners looking for certainty and stability in managing their household expenses, and this is an important milestone to mark."

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