Over recent months, the vast majority of large mortgage borrowers have taken out their loan on a fixed rate basis. Record breaking interest rates have encouraged thousands of high value mortgage customers to fix their payments for two, three or five years – often at rates never previously before seen in the UK.
But, is it time for tracker rates to make a return? The falling costs of tracker rates and the flexibility they offer can be a massive benefit to large mortgage borrowers:
Gap between tracker and fixed rates is narrowing
This Is Money recently reported that the gap between fixed and tracker rates has narrowed substantially over the last few months. It is now possible to fix for five years at just under 2.5 per cent while the best lifetime trackers are at around 2.3 per cent.
And, recent data from a leading mortgage broker suggested that more clients were taking tracker rate deals. The proportion of remortgage borrowers taking variable deals rose from 9.5 per cent in July to 20.8 per cent in August, partly thanks to the falling cost of tracker deals. The average 2 year fixed rate rose to 3.69 per cent in August while the average two year tracker product fell to 3.14 per cent.
Brian Murphy, head of lending at the broker who commissioned the research, said: “The house buying public are clearly open to reassurance from the Bank, with more people willing to trade in the security of fixes this month for the benefit of lower rates.”
Tracker rates beginning to offer excellent value
With the Bank of England Base rate currently at 0.5 per cent, taking a tracker rate deal would seem like a risky proposition. Surely the only way for interest rates to go is up?
“With the Bank of England suggesting that the Base rate won’t rise until 2016 – and even then by a small amount – there doesn’t seem to be a huge risk to taking out a tracker deal,” says Islay Robinson, CEO of London mortgage advisor and large mortgage specialist Enness Private Clients.
“Over the next five years I can’t see interest rates rising significantly. That means that as tracker deals are cheaper now, you’ll be saving money against the equivalent fixed rate all the time that interest rates remain where they are.
“Of course if you’re planning to take out a tracker rate it’s important that you understand what your payments would be if rates were to rise and to stress test yourself against an increase in the Base rate,” he adds.
Another major benefit associated with tracker rate mortgage deals is flexibility. Mr Robinson, the high value mortgage specialist, explains: “Fixed rate mortgages invariable carry ‘early repayment charges’. This means that if you want to repay part of your mortgage, or redeem it in full, you can often face a significant penalty.
“While you should be able to take a good fixed mortgage with you if you move home, there is no guarantee that your new property will be eligible. Or, you may have to sell your home and redeem your mortgage before you buy.
“A good tracker mortgage will have no early repayment charges and that gives you both the ability to repay capital whenever you want and also to move home without being committed to your lender,” he adds.