Money help desk: Cautious borrowers should stick to a competitive tracker

WE ARE currently with the Yorkshire Building Society. We came off a fixed rate deal a few months ago, and, very fortunately, due to the timing, we automatically moved to base rate plus 0.75% (6% at the time, now 5.75%).

This applies for the remainder of the term of our mortgage (a couple of months later and such deals were not nearly as good).

Both my wife and I are naturally cautious people and would prefer to have a five-year fixed deal that would take us to the end of one half of our mortgage.

YBS currently offers such a product that would leave our repayments relatively unchanged but with the security we would prefer, even more so in the present uncertain climate.

We are aware that the base rate will continue to fall as the year goes on and we will therefore continue to benefit by doing nothing, as long as the base rate does not increase.

Ordinarily, we would probably wait till the end of the year; fixed rates would also come down to some extent and we would 'jump' on to one that would be cheaper than is currently on offer.

However, for the reasons we are all too aware of, the differentials between fixed, capped and other rates and base rates are at times inversely related.

Given the foregoing, what would your view be? Just how far down would you expect the fixed rates to go?

KG

John Postlethwaite at Punter Southall Financial Management writes: IN THE current climate the tracker rate you are on with the Yorkshire Building Society is extremely competitive and, as you point out, is far better than you could achieve in the open market at the present time.

However, I note that you are cautious people who would generally prefer a fixed rate.

Within the present climate, it is widely expected that the Bank of England Base rate may be cut in the future and, as a consequence, you would benefit from any base rate cuts that are made while you remain on the tracker.

There are two issues at the moment which are affecting interest rates both now and in the future.

Firstly, there is a reluctance for the banks to lend to each other, as they need to retain any liquid funds they have for their own balance sheets.

This has pushed the Libor rate (London Inter-Bank Offer Rate), which is the interest rate that the banks charge each other for loans, up from 0.23% over the Bank of England Base rate at the beginning of the year to 0.84% over the base rate today.

Also, the swap rates, which determine the costs of fixed rates, have also increased, with those on offer for five years rising from 5% in January to 5.31% today, although there are some signs of these starting to go down.

Secondly, as the money markets have dried up, there are fewer lenders. In broad terms, from more than 100 active lenders at the beginning of the year, we are now reduced to about 30.

Although mortgage lending has dropped significantly, the lenders that are left cannot cope with the levels of business they are receiving.

One way in which they are trying to manage their levels of business is by pricing and increasing rates.

It is not all bad news. The Bank of England is trying to put some liquidity back into the financial markets and restore some confidence by releasing £50bn worth of Government bonds which the banks can swap for illiquid assets.

These bonds can then be traded on the financial markets.

The banks themselves are also trying to raise capital, with the Royal Bank of Scotland and HBOS releasing a rights issue to raise capital. I am sure they will not be the last.

All of this activity leads me to believe that we may not be at the apex of the credit crunch just yet but perhaps fairly close.

If these measures have the desired effect and lead to some confidence within the financial markets, we could see lenders returning to the market.

This will ease the burden on the current lenders, which in turn will lead to a reduction in the differentials being charged and, more importantly, both fixed rate and tracker rate mortgages becoming cheaper.

Therefore, it may be prudent while you are on a competitive tracker to ride out the storm, choosing the best moment for you to fix in the future.

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