Think twice before betting on a cheap tracker mortgage

borrowers Tempted to buy a cheap tracker mortgage due to sky-high fixed rates are urged to think twice.

Experts warn that while their refunds will be lower now, it could cost them thousands of pounds more in the long run.

Tracker or variable rate loans used to be very popular and in 2009 accounted for seven out of ten new mortgages.

Rates rising: The two-year average fixed rate has risen to 4.09%, compared with 2.52% in August last year, according to data analysts Moneyfacts.

But they fell out of favor after the financial crisis, when interest rates plummeted.

This lowered the cost of fixed-rate loans, which protects borrowers from sudden increases in bills.

So for many, looking for a cheap fix seemed like a no-brainer, and only one in 11 outstanding mortgages are now trackers, according to figures from UK Finance.

However, brokers say that as the cost of fixed deals rises, many borrowers are changing their minds. Emma Jones, owner of Alder Rose Mortgage Services, says: ‘We’ve seen an increase of around 10 per cent in interest on mortgages that follow the Bank of England base rate. Many are attracted by up-front rebates, which can be significantly lower than current solutions.’

The two-year average fixed rate rose to 4.09 percent, compared with 2.52 percent in August last year, according to data analysts Moneyfacts.

A typical two-year-old tracker is cheaper by 3.33 percent on average, up from 2.35 percent 12 months ago.

When it comes to top rates, the best two-year fixed offer for a borrower with a 40 percent deposit is 3.24 percent with Barclays.

Skipton does, however, have a two-year follow-up at 0.66 percent plus base rate. This is currently 1.75 percent, for a total of 2.41 percent. On a typical loan of £150,000, this works out to £64 per month, or £768 per year, cheaper.

But analysts predict the Bank of England will raise the base rate by at least 0.25 percentage point next month.

Capital Economics forecasts five base rate hikes between now and May, with experts expecting it to peak at 3 percent before starting to fall in the second half of 2024.

False economy? Brokers say that as the cost of fixed offers rises, many borrowers are considering variable rate loans.

Based on their predictions, broker L&C’s analysis shows that a borrower with a 10 per cent deposit would end up paying an extra £688 a year in interest if they choose the cheapest two-year tracker on the market rather than the best two-year solution. And if they had a loan of £450,000, they would pay £4,127 more over two years.

The gap is smaller for those with larger deposits. But even a 40 per cent deposit borrower, borrowing £150,000, would still pay an extra £165 each year if he opts for a tracker over a fix.

Compare the monthly costs of fixed and tracking mortgages and check out the best deals you could ask for with our best mortgage rate calculator.

Other forecasts are even more pessimistic for those who bet on the base rate. And brokers warn that if homeowners change their minds later, the cost of the repair will be even higher, as lenders frantically search for their best deals.

This could be disastrous for borrowers who have struggled to obtain larger loans.

Dominik Lipnicki of Your Mortgage Decisions says: ‘Most people agree that, like energy prices, mortgage rates will continue to rise. Unless you believe that is not the case, blocking a base rate tracker could be a very dangerous move.

But some experts believe that lenders may be deliberately setting high fixed rates and that prices could fall again.

Jane King, Mortgage Advisor at Ash-Ridge Private Finance, says: ‘Lenders may be pulling out some of their cheapest solutions in a matter of days because they can’t keep up with demand. For those who can handle the risk of increased payouts, there may still be an attraction to betting on a base rate tracker.’

He adds that one of his clients switched to a tracker deal last week and their monthly payments are £90 less than they would have paid with a solution.

“As with any type of mortgage, it all depends on personal risk,” says Ms. King.

Banks and building societies have been inundated with mortgage applications and the average deal is now on the market for just 17 days, according to Moneyfacts.

The best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.

If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.

Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.

You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.

Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.

> Compare the best mortgage deals available now

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