Fixed or Tracker Buy-to-let Mortgages for 2010?

Ah – the eternal investor’s dilemma is as relevant as ever. With the Bank of England (BoE) base rate steadily nailed at 0.5%, one would expect tracker mortgages to be hovering at 2- 3% and fixed rate ones around the 4% mark. Yet they’re not. At 75% loan-to-value, we struggle to get below 4.5% on trackers and 5 – 5.5% on fixed.  This makes for a tough call.

Going on a tracker produces a better cash-flow, but one vulnerable to rate hikes, which seem increasingly likely as we recover from the crisis. There certainly isn’t much leeway for further rate cuts…  For the sake of 0.5% or 1% difference, it is tempting to fix a rate, lock in a respectable return, and put our minds to rest.

Yet although we are soldiering our way up the road of recovery, interest rates are probably going to remain below 1% until the tail-end of the year, if not longer. The BoE is considering phasing out its some of its crisis policies such quantitative easing (i.e injecting money into the economy), but the requisite for low interest rates remains essential to revitalise consumption, business lending as well as the property sector.

So where does that leave us? It is obviously a matter of personal preference but we tend to recommend 1 year trackers around 4.3% at the moment as this is worthwhile as long as the base rate stays round 0.5-1% for the next 8 months or so. Even if it rises to say 1.5% towards the end of the year, the savings made on the repayments until then will more than compensate for the later ones, as the average yearly repayment is still lower than that of fixed rate mortgages. Another advantage is that going on a 1 year product avoids paying an early repayment charge (typically 2.5 – 5%) should you decide to sell or refinance in 2011.

Our conclusion is that for 1 year products, tracker rates at least 0.5% lower than fixed rates look like the more appealing proposition at present.

For investors wishing to sit on a property for over 18 months are probably better off fixing the rate to stabilise the cash-flow whilst plotting their next move.