Nicola asks:

I am a first time buyer looking to purchase a property to the value of £110,000 (maximum) and I currently have £17,000 savings.  Originally, I planned on putting down a 10% deposit leaving me with £6,000 to spend on any legal costs, general mortgage fees and giving me with money for any improvements I may need to make to the property. However, I was advised by a mortgage advisor to put down a 15% deposit so I had more mortgage options to choose from.

My worry is that I will only have about £500 left in my savings and being a regular saver this feels a little daunting.  I have been offered a tracker mortgage with a 10% deposit and quite a reasonable monthly mortgage repayment and also a three year fixed rate mortgage with a 15% deposit which is only about £40 extra a month, but it would mean using £16,500 of my savings. Should I opt for the fixed rate and save like mad or the tracker rate where I’d be able to hang onto more of my savings?

There is no right or wrong answer to this question because, in part, it’s down to what you feel most comfortable with. However, over the last three months we have helpfully seen a significant increase in competition from lenders, including on some rates available with only a 10% or 15% deposit.

The advice from your mortgage broker that you will get a better deal (and more choice) with a 15% deposit is absolutely right and if your budget after completion will still leave you in a position of being able to save on a regular basis, I would be tempted to go down that route as long as if an emergency arose and you’d used up your savings, you could pay the difference with an overdraft or credit card (and would feel comfortable doing so). Saving £40 per month on your mortgage will allow you to increase your savings more quickly initially, but a key question is whether you should have a fixed rate or tracker.

You can get either mortgage up to 90% loan to value and cheaper versions of both up to 85% LTV; so you should really be comparing the best 90% fixed rate with the best 90% tracker and likewise the best of each at 85%. The difference in the initial rates will be that the tracker is 1 - 1.5% cheaper and so although the fixed rate gives you more security the tracker will continue to be cheaper until Bank of England base rate increases to at least 2%. Our economy is in such a mess that I think it is likely that it won't increase above 2% for three years and, even if it does, you will very probably have had the benefit of paying a lower rate, allowing you to save more for most of the three years.

If you choose a tracker it is important to bear in mind that at some point, switching to a fixed rate will probably be sensible, although it is too early to know when that will be. Keep in touch with your mortgage broker to get advice on that. So that you can switch without incurring significant costs, there is a good argument for either making sure the early repayment charges (ERC) are not too high or choosing a lender such as Nationwide which offers a drop-lock option, i.e. will allow you to switch to a fixed rate whenever you like without incurring the ERC.

One other point to bear in mind, particularly if you opt to put down a 15% deposit, is that you can usually add all or most of the lender's arrangement fee to the mortgage and some deals will give you a free or refunded valuation fee, free legal fees (but not disbursements) or a small cashback, typically around £250.

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