Rate rises will hit 90% of borrowers

According to one firm, nine in every ten borrowers are vulnerable to base rate rises.

With base rate so low over the last few years, it’s no great surprise that variable rate mortgages have been so popular. After all, the initial rates are so much lower than on fixed rate mortgage deals.

However, by going for a variable mortgage you leave yourself vulnerable to future fluctuations in base rate. And according to one mortgage firm, an awful lot of borrowers find themselves in this position today.

Legal & General Investment Management reckons around 90% of active mortgages in the UK are on a variable rate.

This is far higher than figures from other sources, including the Financial Services Authority, which most recently suggested 68% of borrowers were on variable deals. L&G reckons that everyone else has underestimated this figure, as they have failed to take into account the number of borrowers who move onto variable rates once their fixed period ends.

And if they’re right, that’s an awful lot of borrowers who have some repayment pain on the way.

Not if but when

This is because base rate will start to rise soon. While bank base rate has sat at its current record low of 0.5% for two years, for much of that time there has been no indication that it would start to rise anytime soon.

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That’s no longer the case. For a while, Andrew Sentence was the lone voice on the Monetary Policy Committee (the body that sets base rate) arguing for a rise, but he has since been joined by two other members. With inflation rocketing to double the committee’s target, experts expect at least a couple of rate rises this year, with one likely as early as May.

The attraction of variable rates

The last few years have shown just why many borrowers are attracted to variable mortgages, with thousands of borrowers seeing their monthly mortgage repayments slashed.

Indeed, the rates on offer to new borrowers have also been pretty sensational, with deals available offering an initial rate of interest of less than 2%! It’s understandable borrowers would want to Forget fixes and turn to trackers.

And such low rates present borrowers with a real opportunity. Sure, they can enjoy the low repayments and splash the rest on nice holidays and iPads, but if they are sensible and instead overpay on their mortgage, they can slash years off their mortgage, saving thousands in interest payments as a result. Indeed, just overpaying for a couple of years can allow you to build up your equity stake in the property far quicker, so that when the time comes to remortgage, you can borrow at a lower loan-to-value, therefore nabbing a more attractive rate!

The safety of a fixed rate

However, once rates start to move upwards, and those mortgage repayments get larger, things may get a little tight for those borrowers on trackers. That’s why now is such a sensible time to nab a fixed rate, and a long-term fixed rate at that.

The rates on offer at the moment are historically really low, and are only going to start rising in the coming months. And while ten-year fixed rates have all but disappeared, there are still plenty of attractive fixed rate deals that offer a great haven for borrowers concerned about the prospect of rising rates. I’ve put together 20 of my favourites in the table below.

20 tremendous fixed rates

The safest tracker around

However, there is one type of tracker mortgage that I’m a huge fan of, and which offers you a little more protection when it comes to rising rates than traditional trackers. I’m talking about the term tracker mortgage (also known as a lifetime tracker).

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With a usual tracker mortgage, you enjoy a rate of bank base rate plus a specified percentage, say 1.5%, for a certain amount of time. So on a two-year tracker offering that interest rate, at the moment you’ll be paying a rate of 2% interest, but if base rate rises to 3%, your rate would rise to 4.5%.

Should base rate move faster than expected, and things start to get painful, you would understandably want to remortgage elsewhere. But if you’re within the initial promotional period (in this example, two years) then you’ll need to pay an early repayment charge, which can be worth thousands and thousands of pounds.

However, with a term tracker, because you commit to pay a certain percentage above base rate for the entire life of the mortgage, rather than just an initial promotional period, there are no early repayment charges to worry about. So the moment things start to get testing, you can get out of the mortgage in no time!

I think these mortgages are brilliant, and have put together a round-up of my favourites below.

10 great term trackers

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Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.