Tracker mortgages are still very cheap: don't be scared into fixing your mortgage rate

Rates may be on the up but trackers are still a savvy mortgage choice for many borrowers

You can’t have failed to have seen the headlines about rising mortgage rates in the last couple of weeks.

A rash of lenders have now hiked their standard variable rates (SVRs) meaning that well over a million borrowers are about to see their monthly mortgage repayments increase, in some cases significantly.

So, after years of mortgage apathy where borrowers happily lingered on their lender’s super low SVRs, remortgaging has suddenly become a buzzword again, as panic begins to set in about rising rates.

Lenders that have announced they will increase their SVRs include Halifax, Royal Bank of Scotland, Yorkshire Bank, Clydesdale Bank and Bank of Ireland Mortgages.

But it isn’t just their mortgage customers who are worried. Reality has hit home for all borrowers on an SVR that they are at the mercy of their lender, no matter what happens to base rate.

The race to fix

It is not surprising that many mortgage borrowers are now considering fleeing to the safety of a fixed rate.

A fix offers you guaranteed monthly repayments that will not increase no matter what the Bank of England does to the base rate, nor your lender to its SVR.

Plus, fixed rates are currently at historic lows, as I explained last week in Now’s the time to get a fixed rate mortgage, and plenty of borrowers would do well to bag these very competitive mortgages while they can.

But while that is entirely the right decision for some borrowers, there is another, cheaper, option for those who are willing to take a little risk.

The terrific transparent tracker!

Tracker mortgages are variable, meaning they fluctuate up and down, so if you are set on locking into a fixed rate they are not for you.

However, they move up and down in a very clear and transparent way because these mortgages track the Bank of England base rate at a pre-determined margin.

For example, if you took a tracker that was pegged at base rate plus two percentage points you would currently pay 2.5% because base rate is currently 0.5%.

If base rate rises to 0.75% your pay rate goes up to 2.75%. If it is increased to 1% your pay rate rises to 3%.

It is very clear and very straightforward. What is important to know is that your lender cannot meddle with your rate as it tracks the base rate at a set margin.

This is very different to SVRs which are entirely at the discretion of lenders. Indeed, the recent hikes have nothing to do with base rate changes (it hasn’t budged in three years!) but are linked to rises in lenders’ costs of funding.

Should you get a tracker?

The main advantage of getting a tracker over a fixed rate is that they are cheaper.

The current average fixed mortgage rate is 4.63%, while the average tracker rate is 3.66%, according to Moneyfacts. And that will make a huge difference to your monthly repayments.

On a £200,000 25-year repayment mortgage the average tracker rate of 3.66% would mean monthly repayments of £1,018, while those paying an average fixed rate of 4.63% would have to fork out £1,126.

That’s £108 more a month for the fix, or £1,296 more a year. That's a very significant premium for the security of a fix.

The base rate would have to rise significantly before your tracker deal became less attractive than the average fix.

And that’s the key, because most experts don’t believe that base rate will rise this year, and possibly not even in 2013. In other words trackers have a lot to offer borrowers who want to pay a cheap rate without being completely at the mercy of their lender’s pricing policy.

Any drawbacks?

There is a massive caveat with tracker rates because, of course, interest rate predictions don’t come with a guarantee.

If rates were to unexpectedly rise quickly and steeply, those paying a tracker rate would see their monthly repayments jump accordingly – and unless a cap is specifically written into your contract there is no limit as to how high your pay rate could go.

You have to be prepared for this, financially and mentally, if you choose a tracker. Today’s current low interest rates are not the norm. In fact, the long-term average base rate is nearer 5% than 0.5%.

And finally, remember that if rates rise by so much that you decide to flee to a fixed deal at a later date, you are not likely to be able to access the fantastic low rates that are on offer today. Lenders will hike their fixes at the first sniff of a rate rise.

If you can stomach all that and you still fancy a cheap tracker, below are some of the best on offer right now:

20 top trackers

More: Cost of mortgage repayments falling | How to stand the best chance of getting a mortgage

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

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