MortgagesMay 4 2016

Tracker rates are increasing as demand falls

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Tracker rates are increasing as demand falls

While the Bank of England base rate has now been held at 0.5 per cent for seven years, Moneyfacts analysis shows the average two-year tracker mortgage rate has increased by 0.06 per cent since November.

Charlotte Nelson, a spokeswoman for the consumer finance website, said this proves the link between base rate and mortgages has been broken.

She explained this could be due external economic threats - unemployment, wage increases and a decline in interest in this type of mortgage.

The percentage of tracker mortgages taken up has fallen from 9 per cent to 7 per cent in just one year, according to Council of Mortgage Lenders statistics from the end of March.

“This suggests that the appetite for this type of product has waned in favour of deals that boast greater security,” stated Ms Nelson. “As a result, lenders have begun to focus more attention on the fixed rate mortgage market, leading to declining tracker mortgage product numbers and fewer low-rate deals.”

 

May-14

May-15

Nov-15

Today

Average Two-Year Tracker Mortgage

2.77%

2.02%

1.98%

2.04%

Lowest Two-Year Tracker Mortgage

1.54%

1.09%

1.04%

1.28%

Average Lifetime Tracker Mortgage

3.19%

3.26%

3.31%

3.08%

Number of Variable Tracker Mortgages

361

351

381

313

Source: Moneyfacts.co.uk

 

 

 

Compiled: 4.5.16

 

Ms Nelson pointed out tracker mortgages do still have some advantages, like no early redemption charges, which gives borrowers flexibility.

“Tracker mortgages may also prove cost-effective over a shorter term; for example, borrowers would be £595.92 a year better off if they opted for the average two-year tracker mortgage compared with the average two-year fixed rate deal, which currently has a rate of 2.54 per cent,” said Ms Nelson, noting this is based on a a £200,000 mortgage over a 25-year term on a capital and interest repayment basis.

“A key question for any borrower when considering such a deal is whether or not they could handle a rate increase if base rate were to rise.”

Andrew Montlake, director at Coreco Mortgage Brokers, agreed as the spread between trackers and low fixed rates decreased, many borrowers prefer to have the added security of a fixed rate product especially, as they have become used to the low interest rate environment.

He said: “Even though the likelihood of a base rate rise has diminished, even a small rise would have a disproportional effect at this time, so the insurance a fixed rate provides is welcome for many borrowers, especially at a time when two, three and five-year fixes look such good value.

“Trackers are still popular with borrowers who want more flexibility however, especially high net-worth clients who want the ability to pay off lump sums with bonuses they may receive.”

Last month, Mortgage Brain’s quarterly product data analysis also suggested most traditional and buy-to-let mortgages have come down in cost over the past three months, as cheap trackers benefit from predictions the base rate will remain low for longer.

Since the start of the year, the cost of the lowest rate 90 per cent loan-to-value five-year tracker fell 10 per cent since January, and is now available with a rate of 2.65 per cent - as of 1 April.

By comparison, the cost of the lowest rate 90 per cent five-year fixed (60 and 90 per cent LTV), and the lowest rate two year tracker (60 per cent LTV), all cost 1 per cent less than they did three months ago.

peter.walker@ft.com