Don’t lock in loan rate – save with a tracker mortgage

Homeowners could potentially save hundreds of pounds by turning down popular fixed-rate deals, credit experts have suggested. More than 1.4 million households will see their borrowing costs rise this year as their current fixed-rate mortgages expire.

Households could be asked to pay an extra £250 per month on average because of rising interest rates. Someone who had taken out a fixed-rate contract for two years two years ago could have received an interest rate of less than 2 percent. Today, those deals are closer to 6 percent.

But some homeowners could soften the blow by delaying signing a new fixed-rate deal. Variable rate mortgages, which have been considerably less popular for years, can now be a cheaper alternative.

What is a variable rate mortgage?

Variable rate or tracker mortgages are loans with an interest rate that rises or falls in line with the Bank of England’s base rate.

Some variable rate loans are not directly linked to the base rate, so the lender has more flexibility to change them as they see fit. The downside is that borrowers with such mortgages can see their monthly payments rise with little or no notice.

Such uncertainty means that floating-rate mortgages are generally much less popular than fixed-rate deals, which guarantee payments will stay the same. Households tend to lock in for two or five years. Until the end of last year, only about one in 20 new mortgages was for variable rate deals.

How much could you save monthly?

The cheapest tracker mortgage is currently 0.26 percentage point above the base rate and is offered by Barclays, according to mortgage broker L&C. Because the base interest rate is currently 3 percent, the interest rate will be 3.26 percent. On a £300,000 mortgage, with a term of 25 years, the monthly payments would be £1,469.

By contrast, Virgin Money’s lowest two-year fix is ​​4.6 percent. Monthly payments would be £1,690. In a year’s time, a homeowner would save £2,663 with the tracker mortgage – if interest rates stay the same.

But what if the base rate rises?

The Bank of England has raised key rates rapidly in recent months and is likely to do so again when it makes its next decision on Thursday. Forecasters predict interest rates could rise by a quarter or half a percentage point to 3.25 or 3.5 percent.

The Bank raises interest rates to keep inflation under control. If inflation doesn’t start to come down soon, base rates could rise further. But there’s enough space between the best tracker and fixed-rate mortgage deals that trackers can get cheaper even if base rates rise significantly.

In the example above, the tracker deal would only become more expensive than the flat rate if the base rate increased to 4.5 percent. In that case, the monthly payments would be £29 per month more for the variable than for the fixed rate deal.

You can switch if you see a better fixed rate deal

The mortgage market is moving fast and fixed rate deals may soon become more competitive again.

Lenders, including Santander, Barclays, Halifax and Nationwide, have even cut their fixed interest rates in recent days. The other benefit of floating rate mortgages over fixed rate deals is that they usually don’t come with any prepayment fees.

So if you sign up for a tracker and then see a competitive flat rate deal you’re happy to stick with, you can always switch.

How popular are they now?

For years, the vast majority of homeowners took out fixed-rate mortgages. Rates were at an all-time low and borrowers were happy to participate. But last year this changed.

“The explosion in fixed rates after the mini-budget caused borrowers to rethink whether their first instinct to fix was the right one,” said David Hollingworth, deputy director at mortgage broker L&C.

‘The jump in fixed rates led to a resurgence in the use of variable rates. We saw tracker rates rise from a niche level of adoption to a whopping 30 percent of applications in November after the mini budget. That has since eased somewhat and the fixed rates have improved. But about one in five still takes out a tracker mortgage.’

So what next for interest rates?

Predicting interest rates is difficult at the best of times. With the economic uncertainty we are going through, that is extra tough.

The Bank of England says it expects inflation to fall sharply from the middle of this year. If it is correct, it has less reason to raise interest rates much further. Meanwhile, financial markets are pricing in interest rates that will soon fall below 4 percent.

“Lower inflation should mean interest rates are stabilizing and even starting to fall,” says Karen Noye, mortgage expert at Quilter.

This could lead to mortgage interest rates falling to 4 percent by the end of the year and possibly even lower in the future, which will have a real effect on monthly mortgage payments.’

What if you’re having a hard time?

Some borrowers may find themselves unable to pay their monthly mortgage payments, even if they opt for a competitive deal. If you are having a hard time, contact your lender as soon as possible.

It can help you, for example, by reducing the amount you pay off for a short period, giving you a break or by extending the term of the mortgage.

You can also get help from Citizens Advice, which offers help to people in debt.

Visit citizenadvice.org.uk or call 0800 144 8848.