More Britons have opted for a two-year tracker mortgage in recent years as they hedged their bets on interest rates falling.
FCA data secured by a Freedom of Information (FOI) request by the wealth manager Quilter revealed a surge in the popularity of two-year tracker mortgages over the past three years.
It showed a 87 per cent spike in the number of two-year tracker mortgages taken out since 2021.
The number of households with trackers rose from 86,212 in the first three months of 2021 to 160,787 in the first three months of this year.
Keeping their options open: Mortgage rate volatility has led more homeowners to take tracker deals – which can be cheaper and easier to get out of than a fixed rate
Tracker mortgages follow the Bank of England’s base rate, plus a set percentage.
For example, someone could be paying base rate plus 0.75 per cent on top with a tracker. With the base rate at 5 per cent, they’d pay 5.75 per cent at present.
But if the base rate was cut to 4 per cent, their rate would fall to 4.75 per cent.
The main benefit of tracker deals is that they typically don’t come with early repayment charges.
If mortgage rates fell over the coming year or two, someone with a tracker deal could switch to a cheaper fixed deal as and when they felt it was the right time.
The quid pro quo is that the rates on tracker deals are typically more expensive than a fixed rate.
Why the surge in tracker mortgages?
The rise in popularity of tracker mortgages suggests more borrowers are looking to keep their options open, due to expectations of falling interest rates in the near future.
The Bank of England cut interest rates for the first time in more than four years on 1 August and it is widely expected to continue cutting rates over the coming months.
At present, markets are pricing in one or two further rate cuts in 2024. If forecasts are correct, this could mean base rate will fall to 4.75 per cent or 4.5 per cent by the end of 2024.
The most bullish forecasters on rate cuts have base rate coming down to as low as 3 per cent by the end of next year, with Goldman Sachs analysts reiterating this rate forecast last month.
This market-implied downward trajectory for interest rates is giving many mortgage holders confidence that mortgage rates will continue to fall. Those on trackers are likely waiting for what they deem to be the right time to fix.
Is now a good time to be on a tracker mortgage?
While the big advantage to a tracker mortgage is flexibility, the downside is they tend to be more expensive than fixed rates at present.
This means it may take a few more interest rate cuts before those on trackers go below what they could get if they fixed today.
The lowest two-year trackers, without early repayment charges are currently above 5 per cent.
Barclays is offering 5.15 per cent (base rate plus 0.15 per cent) and Nationwide is offering 5.19 per cent (base rate plus 0.19 per cent).
Meanwhile the lowest five-year and two-year fixes are below 4 per cent meaning there is a considerable gap at the outset.
Mark Harris, chief executive of mortgage broker SPF Private Clients says that while there was a time when he was seeing more trackers, the number taking them is already on the wane.
He reckons about 90 per cent of the mortgages they arranged in September were for fixed deals.
‘Over the past few months as the pricing of fixed-rate mortgages has fallen, the percentage of fixes being taken has increased,’ says Harris.
‘If you opt for a tracker you will find they are more expensive at least initially, as well as leaving you open to potential rate increases.
‘If you cannot afford to be wrong – that is, if rates were to go up you would struggle to pay your mortgage – then you should consider a fix.
‘Two-year fixes start from 3.89 per cent and five-year fixes start from 3.69 per cent, while a two-year tracker starts from 5.15 per cent.
‘The current debate for clients – unless the flexibility outranks all else – is the length of fix to take – two or five years – rather than opt for a tracker.’
Fixed up: Mark Harris, chief executive of mortgage broker SPF Private Clients says most borrowers are opting for fixed rate deals at the moment
But that flexibility could be important for some people.
For example, someone who is coming to the end of their current deal, but has plans to sell next year, might not want to commit to a two-year fix.
If they don’t remortgage, they will fall onto their lender’s standard variable rate (SVR).
But with the average SVR currently at 8 per cent, according to Moneyfacts, they may well be wise to switch to a tracker deal – even if it includes a product fee.
‘Trackers also have transparency over other variable rates – some lenders did not reduce their standard variable rate by the full 25 basis points since the last base rate cut from 5.25 to 5 per cent,’ adds Harris.
Ravesh Patel, director and senior mortgage consultant at broker Reside Mortgages says the merits of a tracker really depend on the buyer’s circumstances and attitude to risk.
He said: ‘Tracker rates are flexible and offer a good value as buyers can benefit from the falling interest rate during the deal period or switch to a fixed rate should interest rate start to rise, however, a tracker rate is not suitable for everyone.
‘Your employment, income, and your ability to cope with potential changing monthly payments plays a vital role in assessing suitability of a tracker rate.’
Are mortgage rates likely to fall much further?
There is also potentially one major flaw in the tracker mortgage mindset, which is that mortgage rates are forward-looking, and tend to price in future interest rate changes far ahead of time.
Lenders’ fixed rate mortgage pricing is largely governed by Sonia swap rates – inter-bank lending rates which essentially show what lenders think the future holds for mortgage rates.
At the moment, they suggest mortgages might not get that much cheaper.
As of 30 September five-year swaps were at 3.59 per cent and two-year swaps were at 3.86 per cent – both trending well below the current base rate.
The lowest five-year fix is currently 3.69 per cent and the lowest two-year fix is currently 3.89 per cent. From a historical perspective it is rare for the lowest fixed deals to go below their equivalent Sonia swaps.
Peter Stimson, head of product at MPowered Mortgages, told This is Money recently: ‘From a margin perspective, the current lending environment is nothing short of cut-throat.
‘Competition between lenders is the most intense I have seen in the last 30 years of working in the industry.
‘Even if the Bank of England base rate is cut, most of the rate cut is priced in by lenders – although if the bank cuts quicker and more severely than anticipated it could mean rates fall again.’
Don’t rely on market forecasts
While a tracker may seem like a good idea now with interest rates expected to fall, if the last few years has taught us anything, it’s to not trust market forecasts completely.
For example, at the start of the year markets were pricing in six or seven base rate cuts for 2024. That would have seen the base rate fall to below 4 per cent in December.
Peter Stimson, head of the product development team at MPowered Mortgages says mortgage rates have already priced in future interest rate cuts
Fast forward to today, and the base rate is at 5 per cent.
Mortgage broker Ravesh Patel says: ‘The current state of the economy has been quite an eye opener for many people as the UK had low rates for over a decade.
‘The sudden rise in interest rates has been hard on many households so buyers now must always think of the worst case scenario.’
Charlotte Nixon, mortgage expert at Quilter adds: ‘It’s crucial for borrowers to consider the long-term implications and potential interest rate fluctuations.
‘You also must consider the emotional toll that a tracker mortgage might take on you. If you are prone to worrying about money, then you could find yourself getting overly fixated on the Bank of England base rate.
‘The benefits of a tracker must be weighed against the security of knowing how much you will pay each month.
‘For those considering tracker mortgages, it’s important to stay informed about market trends and seek professional advice to ensure that their mortgage choice aligns with their financial goals and risk tolerance.’
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