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It might seem odd for borrowers to be switching to a tracker rate mortgage right now given the uncertainty in the markets and after the highest single base rate rise (0.75%) by the Bank Of England since 1989 in an attempt to stave off the prospects of a long recession – but it could result in significant savings on mortgage payments.
For many years, the certainty of a fixed rate deal, coupled with low interest rates, has made that the most common type of home loan. But this may no longer be the case as fixed rate mortgage deals continue to rise at a greater rate than many trackers.
So, is it a good idea to take out a tracker mortgage right now?
Maybe. It really depends on your personal circumstances and attitude to risk. If you’re on a tight budget, for example, you may prefer to stick to a fixed rate deal even if it means paying a bit more. And if you’re the type of person who finds themselves losing sleep over a potential rate rise, it might be that a fixed rate is your best option too.
But if your current deal is coming to an end, it’s certainly worth comparing tracker rates and fixed rate mortgages deals.
What rates to expect
At the time of writing (November 2022), the best deals on fixed rate mortgages are over 5%, and in many cases, this involves being tied in for five (or even ten) years. And at current rates, even that level of certainty feels like a risk. If rates fall in that time, you could find yourself paying way over the top in a few years.
Tracker rates are currently, on average, around 3% lower than fixed deals when compared like for like. This is a significant difference and one that could see borrowers better off on a tracker.
Is the rate likely to rise?
The Bank of England’s current base rate now stands at 3% and whilst indications are there’s unlikely to be any more large rises there could still be smaller ones before rates begin to come back down, which means fixed rates will likely also rise or remain at the same level for some time yet.
How this will affect tracker rates is yet to be seen. And opting for a tracker is not without risk. If the base rate continues to rise, your repayments will increase. But so far, what we’re seeing is that each interest rate rise widens the gap between fixed rate and tracker deals.
It will be interesting to see how the markets, and lenders, now respond following the Bank of England’s latest base rate increase. Certainly, the difference in monthly repayments at present is quite stark.
On a 25-year mortgage, using the example of a 5-year fixed rate at 5.4%, and a mortgage amount of £250,000, monthly repayments would be £1520.
That same mortgage on a tracker rate of 3.4% would mean monthly payments of £1212 – a saving of just over £300 per month. In these circumstances, the tracker rate would be the most cost-effective way of borrowing until we see it rise by at least 3%.
So, a 2-year or 3-year tracker rate could be the most sensible option if affordability is relatively comfortable and you’re confident you can cover any future rate rises.
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Can you get out of a tracker rate mortgage if you change your mind?
You can, but there may be an early redemption penalty to pay. However, not all tracker rate mortgages include penalties for an early exit, so it’s important you’re clear on the terms of your loan from the outset.
Sometimes, paying the penalty is worth it in the long run if the deal you’re switching to is low enough. And this may well be the case in the future as the markets settle and we get a clearer picture of how the housing market will stabilise.
Conclusion
There is no stock answer to the question of whether now is the right time to take out a tracker rate mortgage. It will be the right decision for some homeowners but not others.
Whether you’re looking to buy your first home, remortgage or invest in a buy to let property, your safest bet is to speak with a whole of market mortgage broker, like those we work with. They will assess your current circumstances and discuss your future plans to help you come to a decision on which type of mortgage is right for you.
They’ll also help you understand the different terms and conditions attached to each loan so you’re fully prepared to act if and when market conditions dictate that is the right thing to do.
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