Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in, and we will get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his advice to a reader below. If you have a question for our experts, email us at money@theipaper.com.
Question: I have put an offer in to buy my first home with my husband. Although we managed to negotiate some money off the original asking price, I am concerned we are going to be left with a high mortgage rate.
I am a first time buyer but he is not. Would a short term fix or even a variable rate be recommended given current economic volatility?
Answer: The temptation when mortgage rates feel high is to assume a short fix or variable rate gives you the best chance of benefiting if rates come down. That should not be the starting point. The better question is how much certainty you need and how comfortable you would be if rates moved the other way.
The fact that you are a first-time buyer while your husband is not does not mean you will pay a higher rate.
Lenders price a mortgage mainly on how much you borrow compared with the property value, known as the loan to value or LTV, your credit history, and the product you choose. While some products offer incentives for first-time buyers, the market is very competitive and buyers who are not first-time buyers can get virtually the same rates, just without extras such as free legal work or cashback.
It can limit access to some first-time buyer deals and incentives, as some lenders require everyone on the application to meet their definition of a first-time buyer.
On the mortgage itself, there are three broad routes worth comparing.
A two-year fix gives you certainty now without tying you in for long. If rates are lower in two years, you can refinance sooner than someone who has fixed for five.
The risk is that two years comes around quickly. If inflation stays stubborn, you could be refinancing into a market no cheaper than today. Each switch can also bring new product fees, which can make a lower headline rate more expensive overall, particularly on a smaller loan.
A five-year fix gives you more certainty. You know what the mortgage will cost for a meaningful period and you are protected if rates rise. That suits many first-time buyers, as the early years of owning a home bring enough new costs.
The trade-off is flexibility. If rates fall significantly, you could be paying more than new borrowers, and five-year deals can carry sizeable early repayment charges if you move or repay early.
A tracker follows the bank rate by an agreed margin, so your payment rises or falls when the Bank of England changes rates. It can suit someone with room in their budget to absorb higher payments, and some trackers have no early repayment charges, leaving you free to fix later.
But a tracker should not be chosen because you believe rates are bound to fall. The base rate is 75 per cent and inflation has risen to 3.5 per cent, well above the Bank of England’s two per cent target.
At its last meeting in September, three of the nine members of the Monetary Policy Committee voted to increase the rate to four per cent. Rates could still improve from here, but there is no guarantee that a two-year fix or tracker will turn out cheaper.
A tracker should also not be confused with a lender’s standard variable rate, which the lender sets and can change at its discretion. It is normally far more expensive than its other deals, so it is rarely one to choose on purpose.
With your offer only just in, there is no need to decide on one rate you have seen today. Once the offer is accepted, compare the best two-year, five-year and tracker options for your deposit and circumstances, looking at the monthly payment, fees, early repayment charges and what would happen if you wanted to move.
If certainty matters and the payment is comfortable, fixing is not a bad decision because rates might be lower in a couple of years. If you have room in your budget and value flexibility, a tracker deserves a place in the comparison.
Once an application is submitted, the rate should continue to be monitored as well. Where the lender allows it, a broker can move the application onto a better product if fixed rates improve before completion.
The aim is not to predict where interest rates will be in two years. It is to choose a mortgage you can live with if that prediction turns out to be wrong.
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