Think twice before gambling on a cheap tracker mortgage


Borrowers tempted to snap up a cheap tracker mortgage because of soaring fixed rates are being urged to think twice.

Experts warn that while their repayments will be lower now, it could cost them thousands of pounds more in the long run.

Tracker or variable-rate loans used to be very popular and in 2009 they accounted for seven out of ten new mortgages. 

Rising rates: The average two-year fixed rate has jumped to 4.09%, compared with 2.52% in August last year, according to data analysts Moneyfacts

But they fell out of favour after the financial crisis, when interest rates plummeted.

This brought down the cost of fixed-rate loans, which shield borrowers from sudden bill hikes. 

So for many, locking into a cheap fix seemed a no-brainer — and just one in 11 outstanding mortgages are now trackers, according to UK Finance figures.

Yet brokers say that as the cost of fixed deals soars, many borrowers are having a change of heart. Emma Jones, the owner of Alder Rose Mortgage Services, says: ‘We have seen around a 10 per cent spike in interest for mortgages that track the Bank of England base rate. Many are attracted to the initial repayments, which can be significantly lower than current fixes.’

The average two-year fixed rate has jumped to 4.09 per cent, compared with 2.52 per cent in August last year, according to data analysts Moneyfacts. 

A typical two-year tracker is cheaper at 3.33 per cent on average, up from 2.35 per cent 12 months ago.

When it comes to top rates, the best two-year fixed deal for a borrower with a 40 per cent deposit is 3.24 per cent with Barclays.

Yet Skipton has a two-year tracker at 0.66 per cent plus base rate. This is currently 1.75 per cent, so a total of 2.41 per cent. On a typical £150,000 loan, this works out at £64 a month, or £768 a year, cheaper.

But analysts predict the Bank of England will raise the base rate by at least 0.25 percentage points next month.

Capital Economics forecasts five base-rate hikes between now and May, with experts expecting it to peak at 3 per cent before starting to fall in the latter half of 2024.

False economy? Brokers say that as the cost of fixed deals soars, many borrowers are considering variable-rate loans 

Based on its predictions, analysis by broker L&C shows a borrower with a 10 per cent deposit would end up paying an extra £688 a year in interest if they chose the cheapest two-year tracker on the market over the best two-year fix. And if they had a £450,000 loan, they would pay £4,127 more over two years.

The gap is smaller for those with larger deposits. But even a borrower with a 40 per cent deposit, borrowing £150,000, would still pay £165 extra each year if they went for a tracker over a fix.

Compare the monthly costs on fixed and tracker mortgages and check the best deals you could apply for with our best mortgage rates calculator. 

Other forecasts are even gloomier for those betting on the base rate. And brokers warn that if homeowners later change their minds, the cost of fixing will be even higher as lenders frantically pull all their best deals. 

This could be disastrous for borrowers who have stretched themselves to take on larger loans.

Dominik Lipnicki, of Your Mortgage Decisions, says: ‘Most people agree that, just like energy prices, mortgage rates will carry on rising. Unless you think that’s not the case, locking into a base-rate tracker could be a very dangerous move.’ 

But some experts think lenders may be deliberately setting fixed rates high, and that prices could come back down.

Jane King, mortgage adviser at Ash-Ridge Private Finance, says: ‘Lenders may be pulling some of their cheapest fixes within days because they can’t cope with the demand. For those who can handle the risk of rising repayments, there may still be an attraction in gambling on a base-rate tracker.’

She adds that one of her clients switched to a tracker deal just last week, and that their monthly repayments are £90 less than what they would have paid with a fix.

‘As with any kind of mortgage, it is all dependent on personal risk,’ Ms King says.

Banks and building societies have been inundated with mortgage applications and the average deal is now on the market for just 17 days, according to Moneyfacts.

f.parker@dailymail.co.uk

Best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England’s base rate has climbed rapidly.

If you are looking to buy your first home, move or remortgage, or are a buy-to-let landlord, it’s important to get good independent mortgage advice from a broker who can help you find the best deal. 

To help our readers find the best mortgage, This is Money has partnered with independent fee-free broker L&C.

Our mortgage calculator powered by L&C can let you filter deals to see which ones suit your home’s value and level of deposit.

You can also compare different mortgage fixed rate lengths, from two-year fixes, to five-year fixes and ten-year fixes, with monthly and total costs shown.

Use the tool at the link below to compare the best deals, factoring in both fees and rates. You can also start an application online in your own time and save it as you go along.

> Compare the best mortgage deals available now

Best mortgages

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