Money News

Base rate kept at record low for fifth month

Tracker mortgages are becoming more attractive, as experts predict the base rate could linger at its low level for longer than previously expected.

The Bank of England’s Monetary Policy Committee has decided to keep the base rate at 0.5% for the fifth month running.

The base rate has been slashed several times from its peak of 5% in October 2008 and was last cut by 0.5% in March.

Ray Boulger, mortgage expert at John Charcol (www.charcol.co.uk) said that as early signs of recovery in the economy are now looking less certain, “the likelihood of the base rate remaining low for longer is increasing.”

He added that the mortgage market is still in distress as lenders continue to increase interest rates on fixed-rate mortgages.

He said that fixed-rates were initially hiked to reflect an increase in swap rates – which affect the price at which banks can borrow money. However, now these swap rates have fallen yet fixed rates have “risen further as lenders respond to increased demand by pushing up rates even more to deter business.”

In comparison, there has been little change in the cost of tracker mortgages over the last month and as a result, the gap between the cost of fixed-rate and tracker mortgages has widened considerably.

Boulger commented: “For anyone who believes the base rate will remain low, say under 2%, for at least three years, there is now a strong argument for considering a tracker mortgage in preference to a fix.”

He advised those thinking about getting a tracker to look for one that allows them to retain the ability to switch to a fixed rate if fixes fall back.

He said: “This will mean either buying a tracker with no, or low, early repayment charges (ERC) or one which offers a droplock option, allowing a switch to a fix without incurring the ERC.”

Nationwide (www.nationwide.co.uk) is the only lender currently offering tracker mortgages with a droplock option. It is offering two and three-year trackers that come with different rates depending on the size of your deposit or the equity you have in your home.