Bank base rate not only looks set to stay low for years to come, but may fall even further. So should borrowers concentrate on cheap tracker mortgages?
Interest rates are expected to stay very low for some time – and could even be cut further. So should homeowners take a gamble on a cheap tracker mortgage?
Trackers vs fixed rates
Homebuyers are usually faced with two options when choosing a mortgage – a fixed rate deal, where monthly repayments are always the same, or a tracker deal, where repayments go up and down in line with the Bank of England base rate, which is currently 0.5%.
The dilemma for buyers is that tracker mortgages are cheaper than fixed deals, but they also come with more risk.
For example, those with a 40% deposit can get a lifetime tracker with HSBC pegged at 2.49% above the base rate, giving a current rate of 2.99%. Monthly repayments on a £150,000 mortgage would be £711.
The cheapest two-year fixed rate is 3.15% with Yorkshire BS, giving repayments of £723.
If a borrower opted for the tracker, but found that the base rate increased to 1%, their monthly repayments would jump to £750 a month, making it more expensive than the fix.
The choice between a fixed and tracker mortgage comes down to what you can afford, and what your attitude to risk is. If you are considering a tracker rate, use our mortgage calculator to work out what your monthly repayments would be when the base rate starts to go up.
Could you afford an increase of two percentage points? If not, you may prefer the peace of mind of a fixed rate deal, even if you have to pay a small premium.
What’s going to happen to the base rate?
Part of the decision-making process is of course working out what you think will happen with base rate.
Last week Sir Mervyn King, Governor of the Bank of England, said the base rate could even be cut further to stimulate our weak economy. He also warned that we are not ‘halfway through’ the economic problems sparked by the banking crisis in 2007.
Most economists think a base rate fall is unlikely, as it would hit banks’ profit margins and make it harder for them to lend to homeowners and small businesses. After all, consumer confidence is low as the UK is back in recession and there are still major concerns over the situation in the eurozone. Unemployment is likely to remain high and wage growth muted.
[SPOTLIGHT]All this makes it very unlikely that the base rate will increase soon, since this would place millions of households under even more pressure and damage the economy further.
Best mortgage for those with a large deposit
Those with the biggest deposits or amount of equity will have access to the best deals.
HSBC is currently offering a fee-free lifetime tracker, pegged at 2.49% above the base rate, giving a current rate of 2.99%. Lifetime tracker means that it is pegged at that amount above base for the entire mortgage term, usually 25 years.
However, with the HSBC deal you can leave at any time, for example to switch to a fixed rate, without paying a penalty. There is also free legal and free valuation work included in the deal.
Best mortgage for those with a smaller deposit
If you want a lifetime tracker, you can get 3.49% with First Direct, giving current monthly repayments of £750. It comes with a £499 fee and there is a £149 fee if you want to leave the deal at any point.
If you've only got a 15% deposit, it's worth a look at Norwich & Peterborough Building Society's two-year tracker at 2.84% above base rate (so currently 3.34%) with a £795 fee.
Whatever the size of your deposit or your circumstances, make sure you shop around. You can use our mortgage tool to compare deals, and also pick the brains of our fee-free mortgage team.
Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online
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.
Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online
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
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