Long term pain, or long term gain?

As the Daily Telegraph correctly predicted last week, the Bank of England Monetary Policy committee last week voted to hold the Base rate at 0.5%.

For those of us with variable/tracker mortgages the recent cuts in rates have seen our mortgage payments plummet. Logically, therefore, it is easy to understand why a lot of the clients I am talking to at the moment about their mortgage needs seem to, at least in principle, prefer a tracker rate.

There is a problem, however, with this thinking.

A year or two ago, the discounts and tracker rates available were excellent. Lenders offering deals for two years round and about the Base rate were the norm - indeed many borrowers took products priced at a discount from the Base rate. I have a very happy client on a deal I arranged for him at 0.51% under Bank of England base rate which means for the next few months he can expect to pay nothing on a fairly sizeable mortgage.

Were those products to be available today, it would be a pretty easy sell to talk someone into a variable rate mortgage with a headline rate of between 0 and 1%. The difficulty is that the goalposts have moved, and any new variable deals are priced much higher than this.

Clients wanting a new variable rate deal today (if they are buying or remortgaging) can expect to pay somewhere in the region of 2.5-3% over the Bank of England base rate. Whilst this still means that clients will benefit from a low rate (somewhere around 3-3.5%) the problem will arise when (and it is a clear case of "when" not "if") interest rates were to rise. Considering that the Base rate has been reasonably stable at around 4-5% over recent years, those clients electing to take a tracker product now could quickly find themselves paying in the region of 7.5% on their mortgage if interest rates were to rise as quickly as they fell.

So, whilst clients instincts to look at variable deals are understandable considering an all-time low Base rate it is clearly imperative that future interest rate movements are taken into account when deciding on the best course of action. A 3% variable rate might look good in the short term, but a 5% fixed rate might very quickly look like better value in the medium to long term once the economy starts to recover and interest rates start to rise.