Money News

Tracker mortgages are ‘difficult to resist’

Monday, 29 June 2009 Writes Hazel Cottrell hazel.cottrell@consumerchoices.co.uk

Lenders are slashing the rates on trackers as they try to keep a balance between fixed-rate and tracker mortgage customers.

Interest rates on tracker mortgages are now so low compared to fixed-rate mortgages that one third of borrowers are choosing them, according to mortgage brokers Mortgageforce (www.mortgageforce.co.uk).

“When the price difference between the two is this significant, it’s difficult to resist the cheaper one”

Previously 75% of Mortgageforce’s customers had been taking fixed rates, but this fell to just 64% last week.

Many tracker mortgage rates have seen recent cuts of up to 0.3%, while fixed-rate mortgage deals have seen increases of around 0.6%. The average rate on a tracker mortgage is now 3.76%, while the average two-year fixed rate is 5.08%, according to financial information company Moneyfacts (www.moneyfacts.co.uk).

Currently, a borrower with a 20% deposit considering a mortgage from Nationwide (www.nationwide.co.uk) can choose between a two-year fix at 6.28%, and a tracker at 5.23%. The rate difference of 1.05% means the monthly payments on a typical £130,000 interest-only mortgage would be £114 cheaper with the tracker.

However, if the base rate was to increase by just three base points, the monthly payments on the tracker would jump by £326, from £566 to £892, making them £212 more expensive than the fixed rate mortgage.

Katie Tucker, technical manager at Mortgageforce said that while a borrower’s choice should take into account how they expect the Bank of England base rate to behave in the next few years, “when the price difference between the two is this significant, it’s difficult to resist the cheaper one.”

She explained that lenders are deliberately making trackers more attractive at the moment in an attempt to keep their split between fixed and tracker customers even and thus “mitigate the risk of their own wholesale costs rising.”

Tucker advised potential borrowers to focus on affordability. She said: “If you can afford the monthly payments on a fixed rate, but would not be able to afford more than that, a tracker would pose that risk, so consider the security of the fixed.”