With some experts warning that we may have to brace ourselves for interest rate rises later this year, it might seem odd to suggest considering a tracker mortgage.
But, amid the economic chaos caused by the Iran war, for some people looking for a home loan or to remortgage, a tracker – where the rate you pay moves up or down in line with the Bank of England base rate – could be a good bet.
Typically, UK borrowers opt for fixed-rate deals, but trackers seem to be enjoying a mini-surge in popularity. The broker L&C Mortgages says the number of people applying for a tracker in April was more than three times that in March.
“They are back in the conversation,” says Nicholas Mendes at the broker John Charcol.
For a long time, as well as offering payment certainty, fixed-rate mortgages were typically cheaper than trackers. But the Iran war has changed all that. Concerns that higher oil and gas prices will stoke inflation has pushed up the money market swap rates that lenders use to decide rates on their new fixed mortgages. Now the best-buy deals are dearer than the cheapest trackers.
Interest rates
Consider the outlook for borrowing costs. At the end of April, the Bank of England left the base rate at 3.75% where it has been since a cut in December. But it said the Iran conflict meant the UK might need to brace for rises later this year because “higher inflation is unavoidable”.
The Bank outlined a worst-case scenario in which the base rate would have to rise to about 5.25% by the start of 2027. On the other hand, said the Bank governor, Andrew Bailey, there was also a chance interest rates could remain unchanged this year if the war was resolved quickly.
Many lenders do not impose early repayment fees on tracker deals, and, with some, there is no product fee either, so you could take one out as a “holding position” and see how things pan out.
If fixed-rate deals become cheaper in a few months, you could then hop on to one of those. And, if the tide does turn, and rates fall, rates on a tracker will follow.
A lot depends on “whether you can afford to be wrong – that is, if rates were to rise, would you be able to afford your mortgage?” says Mark Harris at broker SPF Private Clients. “If not, a fixed rate makes sense and gives you peace of mind.”
Comparing deals
At the time of writing, for those aiming to remortgage, the cheapest two-year fixes were at about 4.55%, while the cheapest new two-year trackers had rates of about 3.96%.
On a £250,000 repayment mortgage, with 20 years remaining, based on those rates, the fix would cost £78 a month more than the tracker (£1,588 as opposed to £1,510). Looking at the above rates, if you took the tracker, we could have two Bank base rate increases, (assuming a 25 basis point rise each time), and you would still be paying less every month than if you had taken out the fixed rate.
The big benefit of taking the fix is that if the Bank’s worst-case scenario comes true, you are fully protected for two years: what you pay will stay at 4.55%. If you took the tracker, you would have no protection, and the rate you were paying would go up to 5.46%.
Therefore, if you are considering a tracker, “think about what your own degree of tolerance is, and how well-placed financially you would be to deal with that”, says David Hollingworth at L&C Mortgages.
If you have a financial cushion, you may be able to absorb a few increases, says Mendes. “A tracker may be worth considering for borrowers with comfortable affordability, savings in reserve, and enough room in the budget to absorb a higher payment.”
There are fears that the war will push up other living costs, so this needs to be taken into account when looking at your budget.
Hedging your bets
The big plus point of trackers is flexibility. “Many come with no early repayment charges, so a borrower may be able to sit on a lower rate for now, and move on to a fixed rate later, if pricing improves. In a market where fixed rates can shift quickly, that flexibility has real value,” says Mendes.
In contrast, if you lock into a fixed rate and the base rate goes down, you will typically face a fee to end the deal.
Halifax and Nationwide are among lenders that do not apply early repayment charges to trackers. But some do, including NatWest.
“No early repayment charge is useful, but it doesn’t mean there are no other costs,” says Mendes. “Arrangement fees, valuation fees, or legal costs can still matter if the plan is to use the tracker for only a few months before switching again.”
Pay careful attention to these fees. In many cases, they are comparable to those on fixes. Arrangement fees of about £900 to £1,000 are not uncommon.
However, some tracker deals offered by lenders, including Nationwide, NatWest and Barclays, carry no product fee. The catch is that the interest rates on these are sometimes a little higher than those with arrangement fees.
Some of the most eye-catching tracker rates come with a sizeable fee. For example, the Halifax 3.96% tracker above carries a £1,499 fee for those borrowing between £75,000 and £1m.
If, within a short space of time, you are paying a fee to get on to a tracker, then paying another fee to move to a fixed rate, that “could erode all the benefit you have gained”, says Hollingworth.
No one can guarantee the pace and scale of any base rate movements, “so mortgage decisions must be made according to your own circumstances, and factoring in the total cost – rate plus fees”, says Mark Harris at the broker SPF Private Clients.
Remortgaging options
If your existing mortgage deal is ending in a few months and you need to remortgage, you can reserve a new loan now and wait to see what happens.
The government’s “mortgage charter” says those approaching the end of a fixed-rate deal should be able to lock into a new deal up to six months ahead (it doesn’t specifically say the new deal has to be another fix).
However, six months is not universal across the market now, says Mendes. Some lenders have moved back to shorter windows – often about three months – to help manage their service levels.
Reserving now means that, if the cost of new deals comes down in two or three months, you are not committed to that offer and can inquire about switching to a lower rate – and take your business elsewhere if necessary.
In most cases the product fee is paid on completion, so many people will not have stumped up a fee in advance which they then might be at risk of losing.
If you don’t arrange a deal to start when your existing one ends, you will usually go on to your lender’s SVR. This is usually set, and moved, at the lender’s discretion.
They can be high: this week, the average was 7.13%, according to the financial data provider Moneyfacts, with some lenders charging more.
There would be very few reasons why a borrower would choose to stay on their lender’s SVR, given that the average rate is above 7%, says Harris. He gives the example of a borrower faced with a choice of paying an SVR of 7.13% or taking out a tracker as a holding position.
“By opting for a fee-free remortgage base-rate tracker from Nationwide, the borrower would (at the time of writing) pay 4.69% and, with no early repayment charges, would have maximum flexibility and potentially save nearly £300 a month on a £200,000 repayment mortgage with a 25-year term.”
If your mortgage is very small, or it is only for a short period, there may be an argument for going on to the SVR, but it is worth checking to see whether your existing lender has a fee-free tracker with no early repayment charges that you can opt for instead, says Harris.
