What’s the price tipping point between tracker and fixed-rate mortgages?By Tony Wornell
This blog was first published on Mortgage Solutions in May 2016.
Since 2008, we have monitored whether would-be movers or remortgagors would prefer a fixed-rate, tracker-rate or variable-rate deal for their next mortgage.
Every year, fixed rates have won out over floating rates, a combination of tracker or variable rates. But over time, the strength of preference has increased. Before 2012, about twice as many potential borrowers chose fixed rates over floating rates, a preference that by November 2015 had widened to six times.
In our 2015 study, we asked borrowers’ reasons for their likely product choice:
- For those choosing a fixed rate, ‘secure/predictable’ and ‘easier/better for budgeting’ were the main reasons
- For those preferring a floating rate, ‘cheaper in the long run’ or ‘cheaper at the start’ were the top reasons
We also dug a little deeper, asking what their likely product choice would be under different rate scenarios. We compared the same rate for fixed and tracker mortgages versus a fixed rate at 0.25%, 0.5% or 1% above the tracker rate.
Product choice emerged as very rate sensitive. With both products at the same rate, over five times as many borrowers would choose the fixed rate over the tracker. Even with a 0.25% fixed-rate premium, most would still choose this over the tracker, although at a reduced margin of around two to one. Around one in three would choose a fixed rate at 0.5% over the tracker. It was only at the 1% fixed-rate premium that most borrowers’ product preference firmly flipped over to the tracker.
So, the key reason for the appeal of fixed rates is greater control, mortgage payments are more predictable and therefore easier to budget for with a fixed rate deal.
For many borrowers, it is worth paying a bit extra – many would pay a rate premium of up to 0.5% – to get this greater control. It is only when tracker rates are a clear 1% lower than fixed rates that most mortgage seekers would choose a tracker mortgage.
In recent years, the market has been the opposite of this, with fixed rates at or below tracker rates, explaining why the preference for fixed-rate products has firmed so much since 2013. It has been a ‘cake and eat it’ environment in which the control benefits of fixed-rate products have been available at no rate penalty or even a rate reduction.