19 Aug 2016
Author: Stephen Breen
Since the Bank of England cut its base rate earlier this month, mortgage brokers have seen an increase in borrowers opting for tracker mortgages.
The rate of interest on a tracker mortgage follows a particular rate – usually the Bank of England’s base rate. The Bank dropped its base rate from 0.5% to 0.25% on the 4th of August.
Until recently, just 9% of mortgages were trackers. However, with the base rate drop – and with many believing that a further drop could be on the cards – more borrowers are choosing trackers for their mortgage deals.
The move towards trackers comes despite the fact that there are plenty of fixed rate deals available at some of the lowest rates ever seen.
Mortgage broker Private Finance has noticed almost half their clients have now taken an interest in tracker mortgages, with the other half giving them some consideration. Other lenders have reported an increase in interest, with the prospect of any rise in the base rate thought to be unlikely until at least 2018 or 2019.
But which is the best choice for you – tracker or fixed?
Base rates could – and likely will – rise at some point in the next few years. Since there is little difference between the fixed rates and tracker rates for two-year deals at the moment, borrowers who opt for a tracker are counting on rates falling further, lenders passing on savings to their customers and rates staying low for the time being.
It is worth knowing that some lenders do not use the Bank’s base rate and instead set their own. Both Barclays and Natwest do not link their trackers to the Base rate, so any further drop will not automatically be passed on to borrowers.
A further consideration is that some tracker mortgages put a limit on how far their rates can fall. This means that even if the base rate falls further, the tracker rates for customers with those mortgages will stay the same.
Edward Checkley, partner at Private Finance, believes that the majority of lenders will pass on further rate reductions. He believes that most fixed rates are priced higher than trackers, so if the tracker is at least 0.125% lower than the fixed rate, even if a further rate cut doesn’t materialise or rates go up a little next year, those with a tracker mortgage should be paying a similar amount to those with fixed rate deals.
It is also worth considering that many trackers have either a limited or no early repayment charge. Some lenders offer a “switch-to-fix” service allowing those on a tracker to switch to a fixed rate when they want to, without incurring a penalty.
However, mortgage manager for First Complete Karen Hedges warns that borrowers should look carefully at the terms of the deal before switching. A deal may look attractive at first glance but borrowers need to see if the tracker rate is for life, or for an initial period. If the tracker is only for an initial period, it is important to understand what the rate will be after that period has finished and whether there are any fees or penalties for switching to another deal at that point. Also, you should check to see if you have to switch to another rate that your current lender offers to avoid a penalty, or whether you can switch to a deal offered by a different lender.
Currently, one of the best tracker deals is with the Woolwich. The rate offered is 0.99% over the base rate which currently works out at 1.24%. The deal requires a 40% deposit (60% loan to value – LTV) and there is an arrangement fee of £999.
HSBC is offering a competitive 2 year fixed deal at 0.99% at 65% LTV, which comes with a £1,499 arrangement fee. However, the terms of this deal may mean that only a select few will be eligible.
Platform, the intermediary for the Co-op Bank, is currently offering a 2 year fixed deal at 1.24%. This also requires a 40% deposit (60% LTV) and has a £1,499 arrangement fee.
Coventry is offering a five year fixed deal at 1.89% or a 10 year fix for 2.39%, but a 50% deposit is required. The arrangement fee is £999.