Tracker mortgages are getting cheaper, using the quantity of products available to borrowers up by nearly 10% in the past month and also the average rate on the two-year deal dropping to just about 2%. But could it be really time for borrowers to ditch the security of a fixed-rate deal?
Whether you’re purchasing a home or remortgaging, it’s a lot of fun to secure a good deal on a mortgage loan, with attractive mortgage rates available across the board.
And while many borrowers are compromising for a longer-term fix while the going is good, cheap tracker mortgages – which vary in cost in line with the Bank of England base rate – are dropping in price and creeping in popularity.
Here, we explain the advantages and disadvantages of trackers and provide advice on whether you need to risk your type of loan.
Rates fall on tracker mortgages
New data from Moneyfacts implies that the average two-year tracker type of loan has fallen to simply 2.02%.
This drop continues to be related to increased competition between lenders, using the quantity of tracker mortgages rising from 185 to 202 within the space of the month, up by 9%.
Tracker mortgages stick to the Bank of England base rate (currently 0.75%) along with a margin, so if a tracker is placed in the base rate plus 1.5%, the rate you’ll pay is going to be 2.25%. A 0.25% base rate increase would check this out rise to 2.5%.
As with fixed-rate products, the rate of increase on the tracker mortgage is placed for a specific period. The vast majority of tracker mortgages have two year introductory terms, though a number of three and five-year deals can be found.
Fixed-rate mortgages v trackers
Trackers are riskier than fixed-rate mortgages, because if the financial institution of England increases the base rate, your monthly repayments increases, too.
This implies that lenders must offer tempting rates on trackers that counteract this component of risk. The current average rate of 2.02% on the two-year tracker may be the lowest we’ve seen since September last year.
The graph below implies that the space between your average rate on a two-year fix (2.47%) along with a two-year tracker (2.02%) is nearly half a percent, meaning that (theoretically a minimum of) trackers should be able to comfortably absorb at least one increase in the base rate.
Best rates on fixed and tracker deals
But how much stock can we really put on average rates? In the end, the average for two-year trackers is just according to about 200 deals, while the average for two-year fixes is based on nearly 2,000.
In the tables below, we’ve instead checked out the best initial rates currently available on two-year fixes and trackers at three popular loan-to-value (LTV) levels – 60%, 75% and 90%.
60% LTV
| Mortgage type | Lender | Lowest introductory rate | Revert rate | APRC | Fees |
| Two-year fix | Halifax | 1.35% | 4.24% | 3.8% | lb999 |
| Two-year tracker | Halifax | 1.29% (BR+0.54%) | 4.24% | 3.8% | lb999 |
Rate gap: 0.06% in favour of the tracker
75% LTV
| Mortgage type | Lender | Lowest introductory rate | Revert rate | APRC | Fees |
| Two-year fix | Halifax | 1.47% | 4.24% | 3.8% | lb995 |
| Two-year tracker | Halifax | 1.37% (BR+0.62%) | 4.24% | 3.8% | lb999 |
Rate gap: 0.1% in favour of the tracker
90% LTV
| Mortgage type | Lender | Lowest introductory rate | Revert rate | APRC | Fees |
| Two-year fix | NatWest | 1.79% | 4.24% | 3.8% | lb995 |
| Two-year tracker | Accord | 1.94% (BR+1.19%) | 4.25% | 4.3% | lb995 |
Rate gap: 0.15% towards the fix
Could the cheapest deals absorb basics rate rise?
As you can observe, the gap in initial rates on the cheapest deals could be negligible at best, as well as for borrowers at 90% LTV it’s already cheaper to obtain a two-year fixed-rate deal than a tracker without factoring in almost any future base rate increases.
At other LTVs, a tracker might offer lower monthly obligations than the usual fix right now, but none of them of the greatest rates shown above could absorb a 0.25% increase in the bottom rate, as shown in the charts below.
Is the bottom rate likely to increase?
That’s the million-dollar question. The Bank’s nine-strong Monetary Policy Committee votes on whether to change the base rate each month, and this month it voted unanimously to keep the rate at 0.75%.
At the moment, the signs are that the imminent rise seems highly unlikely, and Santander’s chief economist Francis Haque says we’re unlikely to determine an increase this year.
But with uncertainty around Brexit, things could change – meaning borrowers considering a tracker mortgage should think carefully before jumping in.
Darren Cook of Moneyfacts says: ‘Financial markets are forecasting only a single rate of interest increase by 2022, however with current economic conditions so unpredictable, this timescale may shorten and variable mortgage rates could increase sooner as a result.
‘Therefore, those considering a flexible rate tracker mortgage should always factor in any rate rises that may affect whether they can afford the repayments for the period of their term.’
What happens when the base rate falls?
What rises may also go down, but a fall within the base rate wouldn’t necessarily give you a cheaper deal on a tracker mortgage.
That’s because many tracker deals have ‘collars’ inserted into them, meaning that the rate you have to pay can’t drop below a set amount, whether or not the base rate falls.
And with rates currently in a low-level, most lenders set their collar in the current rate – meaning the headline rate you see will be as good as it gets.
