Tracker mortgages are becoming increasingly popular as they are roughly 0.4% cheaper than typical fixed-rate deals, according to a mortgage expert, who also warned that borrowers face risks if the Bank of England raises interest rates.
Inflation and rate cut uncertainty
Official figures released this week showed that inflation rose to 2.9% in July, up from 2.6% in June, and brokers say there is a chance that the mortgage rate cuts of recent weeks could be paused. If inflation continues to rise as the effects of the Middle East conflict feed through, the Bank of England may keep rates higher for longer, or even increase rates if it believes there is a possibility inflation will start to spiral.
Since this week’s inflation data, swap rates, which are used to price fixed-rate mortgages, nudged up slightly, reinforcing the view that further material rate cuts by lenders might be off the cards for now.
Growing interest in trackers
Mortgage expert Jamie Elvin, director of London-based Strive Mortgages, said the fixed-rate mortgage rates that were available before the Middle East conflict began at the end of February might not be back for some time. As a result, he said that a growing number of people were starting to look elsewhere: “Tracker mortgages are starting to crop up a lot more when discussing options with borrowers.”
“Right now, trackers are roughly 0.4% cheaper than a typical fixed rate mortgage and many people who perhaps wouldn’t have considered one before are paying them a bit more attention. The cheapest tracker rate is currently around 4.1%, while the cheapest fixed rates are usually priced around 4.5%, so it’s no surprise that trackers are becoming more attractive. Savings of 0.4% and above can make a real difference, especially at a time when the cost of living is so high.”
Flexibility and risks
Jamie said people opting for a tracker rate were clearly exposed to the Bank of England base rate, which they track, and won’t be suitable for everyone. But he said tracker products are flexible and could be switched quite easily.
He continued: “A lot of people are unaware that you can take out a tracker mortgage and jump off it at any point onto a fixed rate with no ERC (early repayment charge) if the base rate starts to creep up and you think it may rise even further. Equally, if mortgage rates start to fall and a decent fixed rate becomes available that you you’d be happy with, again most of the time you can switch with no fees.”
Jamie said that anyone considering a tracker needed to go in with their eyes wide open, as monthly payments could well rise if the Bank of England hikes its rates. He continued: “Seeking advice from a professional is important when you take out any mortgage, but especially with trackers as the risks are clearly higher and a borrower needs to be aware of them.”
