Should you fix your mortgage rate now?

If your mortgage deal finishes this year you may be rubbing your hands at the thought of taking advantage of some extremely good rates that are on offer at the moment. But should you ride the tracker bandwagon while interest rate remain low, or settle in to a fixed deal?

Remortgaging is big business and according to the Council of Mortgage Lenders gross-mortgage lending (ie, not including repayments) reached an 11-month high in October, jumping over 13% from the previous month to £12.9 billion.

If you are looking to remortgage this year you may be confused about how to approach your next deal. Interest rates have remained at 0.5% for over three years and according to Ray Boulger of mortgage broker John Charcol, they are unlikely to rise until 2015 ‘and when they do they will rise very slowly’.

Tracker v fixed deal

However, low interest rates do not necessarily mean a tracker mortgage is the best idea. Boulger said lenders have already factored in interest rates into the cost of trackers and at the moment there are fixed deals that are offering better rates.

‘You can get a five-year fixed deal at less than 3%, some are less than trackers,’ he said. ‘If you compare two-year fixed rate deals – and you have plenty of equity – you can get a deal at 2.29%, whereas if you take a tracker it will be more than that.’

A short-term fix

Considering the deals on offer, fixed rate trumps trackers. This has much to do with the government’s Funding for Lending scheme, which has made £80 billion available to lenders to lend to consumers, which in turn has made the mortgage market more competitive.

So if you are going to fix, how long should you fix for?

The Co-operative Bank has just released a five-year fixed deal at 2.79% and Boulger believes more lenders will start offering more competitive five-year deals.

As he does not believe interest rates will increase over the next two years, buying a two-year fixed mortgage is ‘buying protection you will not need’.

‘The five-year deals are better value. Even though interest rates are not going up, the further out you look the bigger the chance there is of something changing,’ said Boulger.

What’s the cost?

Comparing mortgages is not just about rates, there is also the arrangement fee to take into consideration, said Boulger. The longer you fix for the larger the fee you can afford to pay because you know you won’t have to shell out for another fee in just a couple of years time.

How much you are borrowing also affects how good the value of the fee is. If you are borrowing a larger amount then it is better value to pay a higher arrangement fee to get a better rate.