Is now the time for a tracker mortgage?
We’re living in turbulent times politically and it’s tempting to choose a fixed-rate mortgage deal to get financial security for the years ahead. But could you save money by taking out a tracker instead?
July 29, 2019
With ongoing political uncertainty, it seems logical that many homeowners want to seek some stability when it comes to their mortgage payments and so choose fixed-rate deals.
The popularity of tracker loans, which sees the amount you pay go up and down in line with the Bank of England’s base rate, had waned in recent years as lenders began offering increasingly cheap fixed-rate deals. In fact, around 90% of borrowers now take out fixed rate deals, such as HSBC’s 1.34% two-year fixed-rate deal.
However, this could be set to change. The Times reports that homebuyers are ‘reassessing the merits’ of tracker loans. It seems thanks to speculation about potential cuts to the Bank of England’s base rate, tracker mortgages could be about to make a comeback.
What is a tracker mortgage?
A tracker mortgage goes up and down with the Bank of England’s base rate. For example, you can have a tracker that is base rate plus 1%, meaning the interest you pay will always be 1% above the Bank of England base rate.
Tracker rates can be for the entire length of the mortgage, or just for an introductory period (between two and five years). After this period the rates revert to the lender’s standard variable rate (usually a lot more expensive).
They tend to be cheaper than fixed-rate deals but by their nature the amount you pay can go up as well as down.
Why now could be a good time to move to a tracker mortgage
The Bank of England base rate has been 0.75% for almost a year. However there is speculation it could drop if there is a no deal Brexit. According to The Times, some experts believe it could fall to 0.25% or possibly lower if we leave the EU on 31st October without a deal.
If a no deal Brexit causes the pound to weaken, this is likely to put pressure on inflation, the paper reports. The Bank would normally control this by putting up interest rates. But to support the economy it is likely to cut its base rate, says David Hollingworth of L&C Mortgages.
“A tracker rate pegged to the base rate could get cheaper if rates are cut,” he told the paper. However he warns that borrowers need to be able to afford higher repayments if rates rise.
What to watch out for
There is some terminology you need to understand before deciding which product is right for you. Beware trackers with a “collar” or “floor”– this is a minimum interest rate. So if the base rate falls you could be prevented from benefiting from it fully, or possibly even at all.
Check if the tracker charges a penalty if you leave or switch early. If you pick one that doesn’t charge a fee you could switch to a fixed-rate deal without incurring any penalties.
And one way to hedge your bets is to choose a “droplock option”, which lets you lock into a fixed rate offered by the same lender at any time.
What are the downsides?
It’s important you remember there is always potential for rates to rise. This means you will pay more each month for your mortgage if you have a tracker. While many experts believe rates could be cut under a no deal Brexit, rates could go up if a deal looks likely.
There is also speculation over potential rate rises if a general election is called and Labour wins.
However it’s essential to remember that no one knows for certain what will happen to interest rates. So it’s crucial to consider your personal financial circumstances when choosing what type of mortgage to get. If you have a small mortgage and a high level of disposable income you may feel the potential benefits outweigh any risks.
However, if you have a large mortgage and need to balance your budget carefully each month to make sure you can pay the bills then the stability of a fixed deal may suit your needs better. Speaking to a mortgage broker is a great place to start – they can help you understand the pros and cons of each type of mortgage.
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