Tracker Mortgage Rates Start to Rise as Demand Falls

By: MoneyFacts

The Bank of England base rate has now been on hold at 0.50% for seven years, so it would be fair to assume that variable rate tracker mortgages have also remained static. However, research from Moneyfacts.co.uk shows that this is not the case, with the average two-year tracker mortgage rate increasing by 0.06% since November 2015.

Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, said:        

“The increase in the average rate of tracker mortgages is evidence that the link between base rate and mortgages has been broken – there has been no rise in the Bank of England base rate and yet the lowest two-year tracker mortgage rate on the market has risen from 1.04% to 1.28% in just six months.

“This could be due external economic threats i.e. unemployment, wage increases and a decline in interest in this type of mortgage - the percentage of tracker mortgages taken up has fallen from 9% to 7% in just one year*, which suggests that the appetite for this type of product has waned in favour of deals that boast greater security. As a result, lenders have begun to focus more attention on the fixed rate mortgage market, leading to declining tracker mortgage product numbers and fewer low-rate deals.

“Nevertheless, tracker mortgages do have advantages that could suit the right borrower. For instance, the majority of lifetime tracker mortgages have no early redemption charges, which gives borrowers a fair amount of flexibility. This flexibility can also be achieved by sitting on a standard variable rate (SVR), but this could prove to be more costly; for instance, those who choose the average lifetime tracker mortgage would be £190.38 a month better off than if they were sitting on the average SVR of 4.81%**.

“Tracker mortgages may also prove cost-effective over a shorter term; for example, borrowers would be £595.92 a year better off if they opted for the average two-year tracker mortgage compared with the average two-year fixed rate deal, which currently has a rate of 2.54%**.

“However, a tracker mortgage should not be taken out without consideration. A key question for any borrower when considering such a deal is whether or not they could handle a rate increase if base rate were to rise. The timing of a base rate rise is still uncertain, but borrowers should ensure that they are prepared for this eventuality. If they are unsure, they would be wise to get independent financial advice.”

*Source: CML Regulated Mortgage Survey – 31.3.16

**Based on a £200,000 mortgage over a 25-year term on a capital and interest repayment basis.

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