Borrowers advised to opt for tracker mortgages
Mortgage borrowers are being advised to take out tracker products rather than fixed rates despite the Bank of England voting to keep interest rates at 5.5% in January.
Economists and mortgage lenders were largely expecting the Bank to cut rates in January in order to lessen the impact of the slowing housing market and also help out the estimated 1.4 million borrowers facing payment shock as their fixed rate periods end.
Despite the controversial move to freeze rates, experts say an interest rate cut still looms on the horizon with some predicting it could be cut by as much as 0.5% in February.
Mortgage brokers and lenders are now advising borrowers to opt for tracker rate mortgage products in order to take advantage.
Stephen Leonard, director of mortgages at Alliance & Leicester, says: "A tracker mortgage is a good option for home owners who are financially flexible and looking to take advantage of any further interest rate cuts during the next 12 months."
However, he advises first-time buyers to opt for the security of a fixed rate mortgage.
John Postlethwaite, principal at financial adviser Punter Southall, also urges home owners coming off fixed rate mortgages to take advantage of deals on tracker deals.
He believes that a tracker product - like Nationwide's tracker priced at 0.34% over Bank of England interest rate - may offer better value than a fixed in the long run.
Postlethwaite says: “Although Nationwide's initial interest rate is higher at 5.84% there are no fees and if rates fall then you will take advantage of the lower payments. Plus if fixed rates do fall, Nationwide has confirmed borrowers will be able to switch onto a fixed rate in the future without penalty. This allows you to hedge your bets and take advantage of the lower predated fixed rates in the future rather than be stuck with what is available now."
Andrew Montlake, partner at independent mortgage broker Cobalt Capital, agrees that tracker rate mortgages are the most attractive proposition for borrowers in 2008.
He says: “If your mortgage is tracking the Bank of England interest rate, you will instantly be on to a winner. Given that it will be some time before fixed rate products become competitive again, and that lenders are unlikely to pass on rate reductions in full to those on standard variable rates, the clever money is very much on tracker products.”
But Ray Boulger, of mortgage broker John Charcol, says that while tracker products are a good option at this stage, borrowers shouldn’t completely discount fixed rates.
He adds: “The really good news for borrowers who need or prefer the security of a fixed rate is that I expect to see several lenders offering cheaper fixed rates over the next few weeks.”
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.