Tracker Mortgages: Why are they making a comeback?

The tracker is back

Getting the most appropriate mortgage deal is harder than it seems, for three reasons:

• First, because the market for home loans is fiercely competitive, and lenders vie with each other to attract borrowers.
• Second, because what is a suitable deal for one borrower may work out as a financial millstone to another.
• And thirdly, because the factors that influence the first two points are constantly changing. The deal that works out one month might be much less appealing the next, as costs, market forces and global events can all change rapidly.

Right now, global economic uncertainties seem to be influencing many would-be borrowers. And some are choosing a tracker mortgage as a result.

What is a tracker mortgage?

For years, many people have chosen the certainty of a fixed rate for their mortgage. Prices tended to be competitive, and by fixing for as long as possible, borrowers could be confident about exactly what they would pay for years to come. Those who chose a fixed rate when the Bank of England rate was below 1% were able to enjoy years of low monthly repayments.

These deals, which date back to the Covid crisis are coming to an end, and remortgaging to a new fixed rate deal could mean a big increase in monthly outgoings.

How do they work?

Tracker mortgages work on a very different principle. They are flexible, which means that monthly repayments can change, and follow the Bank of England base rate, plus a certain percentage on top.

For example, someone might be offered a tracker mortgage at base rate, currently 3.75 %, plus 0.25%

This would set the rate they pay at 4%. If the base rate rose to 4%, though, their mortgage rate would rise to 4.25%. This might be painful, but if the base rate is cut to 3.5% the tracker rate, and the interest they pay drops to 3.75%.

The potential of leaving the door open to reduced payment if the bank rate falls is one of the factors driving renewed interest in trackers.

The benefits of tracker mortgage flexibility

But the appeal might not stop there. Tracker mortgages also differ from fixed rate deals in that they tend to come without early repayment charges.

This means that, unlike fixed deals, they can often be paid off, overpaid or replaced without penalty.

Borrowers with a tracker might have some big advantages. If the base rate falls, they immediately pay less. If the base rate rises, they could switch to a fixed-rate deal if those became cheaper.

Why tracker mortgages have made a comeback

The popularity of tracker rates has now trebled in the wake of the Middle East crisis, new figures show.

The flexibility of trackers in uncertain times is one reason. It has become hard to predict whether the Bank of England’s next rate move will be up or down, and when it might come. As we’ve seen, the tracker might help cut costs or reduce commitment, depending on the direction of change.

But this means that lenders are wary of offering the most competitive rates for long-term fixes, taking the view that any big hike in bank rates would leave them with a costly liability if they kept rates low.

Fixed rate deals have become more expensive, as lenders need to cover themselves against longer-term market pessimism. However, they can afford to offer attractive rates on trackers, simply because they are not committed to low rates.

The lowest two-year trackers for someone remortgaging are below 4% while the lowest fixed rate deals are 4.55% or higher. With a 25-year repayment mortgage on £250,000 the difference is roughly £80 a month, or about £960 a year.

Should you choose a tracker mortgage?

A tracker could offer savings compared to a fixed rate, but it does mean that monthly repayments will rise if the Bank of England raises rates.

Whether or not they do will depend on everything from the expected inflationary fallout from the Middle East conflict to economic growth at home.

But would a tracker be appropriate for you?

Remember our second point – a suitable deal for one borrower may work out as a financial millstone to another.

To see if a Tracker could help you, and to see the kind of deals that are available across the whole lending market, you need an expert.

Call us at Continuum for the expertise you need.

How to lower your monthly mortgage payments – This Is Money

This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your mortgage planning

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

You may have to pay an early repayment charge to your existing lender if you remortgage