The popularity of tracker rates has now trebled in the wake of the Middle East crisis, new figures show.
The proportion of borrowers opting for trackers leapt to 12 per cent in April up from 4.1 per cent a year earlier, analysis by Stonebridge mortgage and protection network revealed.
In contrast, the proportion of fixed rate deals fell to 87.6 per cent last month, according to Stonebridge, down from 95.4 per cent a year ago.
The surge in demand coincides with fixed rate deals rising and tracker mortgage rates looking like good value.
The lowest two-year trackers for someone remortgaging are below 4 per cent while the lowest fixed rate deals are 4.55 per cent or higher – more than half a per cent more.
It means that some people opting for trackers could see the Bank of England hike interest rates twice this year to 4.25 per cent and still not be worse off than if they fixed at the moment.
Cheaper: The popularity of tracker rates has now trebled in the wake of the Middle East crisis
Tracker mortgages follow the Bank of England base rate, plus a certain percentage on top.
For example, someone might be given a tracker mortgage at base rate, currently 3.75 per cent, plus 0.25 per cent.
This would set the rate they pay at 4 per cent. If the base rate rose to 4 per cent, though, their mortgage rate would rise to 4.25 per cent. Or if the base rate is cut to 3.5 per cent the tracker rate drops to 3.75 per cent.
Tracker mortgages also have a rather unique feature in that they tend to come without early repayment charges.
This means that, unlike fixed deals, they can often be paid off, overpaid or switched away from without penalty.
It gives homeowners on a tracker a crucial get-out, in the case that the base rate rises – and means they could switch to a fixed-rate deal if those became cheaper.
The speed at which trackers have come into favour reflects a degree of confidence that the Bank of England won’t raise rates, according to Rob Clifford, chief executive at Stonebridge.
Markets currently appear to be pricing in one or two rate hikes later this year by the Bank of England due to the expected inflationary fallout from the Middle East conflict.
However, the central Bank will also be keeping a close eye on economic growth and unemployment – two potential threats that could tempt it to hold or cut rates.
The fact that so many more people are opting for trackers suggests many borrowers are confident that the conflict and subsequent inflation shock will end relatively quickly.
‘It’s a fascinating time to be a mortgage adviser,’ says Clifford. ‘At times like this, borrower preferences can give you an inside track on what people really think geopolitically.
‘At the moment, they are signalling that they believe the worst may be over. Borrowers are increasingly willing to take on a little more risk for the chance of lowering their monthly payments when the crisis ends and rates start coming down.
‘This is valuable intelligence for advisers, not because all borrowers are the same but because it underlines how important the question of risk is for customers and how we must not assume that all borrowers are risk averse.
‘A first-time buyer with a 5 per cent deposit may have identical opinions on international events but they might be in completely different camps when it comes to product type.’
How do trackers compare to fixed rate deals?
Someone remortgaging their home with 40 per cent equity can secure a 3.96 per cent rate with Halifax or Lloyds Bank, albeit both come with £1,499 arrangement fees.
On a £200,000 mortgage being repaid over 25 years that means paying £1,051 a month.
If they were to opt for a two-year fixed rate, the best deal they could get is a 4.55 per cent deal with Leeds Building Society – also with a £1,499 fee. They would end up paying £1,118 a month.
Fixing for five-years would be even pricier. The best deal being a 4.69 per cent rate with HSBC.
For someone remortgaging with a 25 per cent equity in their home (75 per cent loan-to-value) the lowest two-year tracker is 4.08 per cent with a £1,499 fee – either with Halifax or Lloyds Bank.
The lowest two-year fix would be 3.64 per cent with Leeds BS or a 3.74 per cent five-year fix with HSBC.
The gap continues for those with 10 or 15 per cent equity in their homes.
For someone needing their remortgage to cover 85 per cent of the property’s value. The lowest two-year trackers are 4.26 per cent.
For someone fixing for two years it’s 4.82 per cent and for a five-year fix is 4.9 per cent.
On a £200,000 mortgage with a 25 year repayment term that could be the difference between paying £1,084 a month and £1,157 a month, the equivalent of £876 a year.
‘A wider margin between fixes and the initial rates on tracker deals has seen more borrowers betting on base rate only seeing a gentle increase, if it rises at all,’ says David Hollingworth, associate director at L&C Mortgages.
‘Others will be hoping that fixed rates can improve further and are using a tracker with no early repayment charges as a holding position, allowing a switch to a fixed rate at a later date.
‘Of course, if rates do climb it will push payments higher, so this strategy is likely to appeal to those with more flexibility in their monthly budget.’
