Mortgages: a tracker could save you money

If the Ernst & Young ITEM Club forecast is right and Bank Base Rate is really set to remain at 0.5% until the end of 2013, it’s good news for homebuyers and makes trackers look a much better bet than fixed rate mortgages - in spite of the fact that fixed rates have come down in price.

But you pay your money and you make your choice. There are just as many economists who believe that inflation is in danger of becoming embedded and that the only remedy will be to increase interest rates – sooner rather than later. Andrew Sentance, a member of the Bank of England Monetary Policy Committee, has already called for a rate rise to head off potential inflationary pressures and others are expected to join him over the coming months.

One thing is certain, inflation as measured by both the Retail Prices Index and the government’s preferred benchmark, the Consumer Price Index, is not going to fall any time soon. With a 2.5% rise in VAT in January of next year, prices are bound to go up across the board. Nor are fuel prices likely to decline significantly so RPI inflation is likely to average at least 4% over the coming year from its current level of 5%.

Your options

So what is available for house purchasers and those looking for a remortgage in the tracker market? For those with a 35% deposit or equity in their home First Direct’s lifetime tracker continues to head the best buy table at Bank Base Rate plus 1.79% giving a current pay rate of just 2.29%.

First Direct’s lending criteria are tough though and any hint of a dubious credit track record is likely to result in a rejection. But it is an excellent deal with a fee of just £99. There is the added advantage with this mortgage that there are no early repayment penalties so if interest rates look like rising, you can switch to a fixed rate at any time.

In addition if you pay 0.2% extra - a pay rate of 2.49% - you can have an offset mortgage which will reduce monthly repayments or allow you to pay off your borrowing earlier. Mortgage broker London & Country () has a calculator which shows by how much you can shorten the term of your loan and what interest you will save by using an offset facility.

Even if you are happy to remain on your current deal – some lucky homebuyers are paying only 2.5% on their lender’s Standard Variable Rate – you should be checking that your finances will withstand an unexpected rate rise. With ‘stress testing’ flavour of the month London & Country also has an online rate change calculator. This will allow you to see how repayments might be affected by interest rate rises.

First time buyers

Nobody needs advice quite as much as first time buyers. To meet demand from FTBs, Yorkshire Building Society is launching two new best buy mortgage deals for people who need to borrow up to 90% of the value of their home. There is a market-leading two-year fixed rate deal at just 4.95% with a £995 fee or a three-year fixed rate deal at 5.69% with a £995 fee. This is more expensive than deals with lower loan to value – but still a reasonable proposition.

Given that FTBs cannot afford to take chances and risk an unexpected rate rise, a fixed rate looks the sensible option. ‘By ensuring we only offer fixed rates in this area we can make sure our borrowers have peace of mind when it comes to their mortgage payments whether they are looking to buy their first property or remortgage,’ commented Tom Girling, Yorkshire Building Society’s product manager for mortgages.

For FTBs who are short of cash you can get the same 90% loan at 5.19% fixed for two years or 5.89% fixed for three years and it includes a free standard valuation and free legal service for those buying a property, or free standard valuation and £250 cash back for those looking to remortgage. Both products carry a £495 fee and are available at any of the Yorkshire’s 135 branches. Find your nearest YBS branch here.

Self Build

At a time when mortgage money is in short supply for anything other than ‘plain vanilla’ home loans, Leeds Building Society is leading the way with a new variable rate ‘self-build’ mortgage, specifically designed to help people build their own homes. Loans up to 75% of the property’s eventual valuation are available on a two year variable rate loan, currently 6.19% with a fee of £999.

Funds are released in five stages - land purchase, wall plate, roofed in, plastered out and completed. Leeds will release up to 75% of the value for each, which is extremely useful to self-builders both in terms of managing their outgoings and cash-flow.