When is a tracker or variable mortgage a good idea?

There is little relief on the horizon for homeowners as mortgage payments continue to rise amid expectations that the Bank of England will further raise its key interest rates.

For those who need to re-mortgage in the near future, the options are unappealing. Nearly 40 percent of current fixed mortgages will expire before 2025, many of which currently have interest rates below 2 percent.

The current market offer looks very different. On July 5, the average two-year fixed rate rose to 6.51 percent, according to Moneyfacts, with no major lender offering interest rates below 5 percent.

At the same time, the average interest rate on a two-year mortgage is currently 5.96 percent.

Trackers are a type of variable interest rate that tracks the Bank of England’s base rate, plus a certain percentage.

Crucially, some — but not all — variable mortgages have no prepayment fees, meaning homeowners are free to opt for a fixed rate as they get cheaper.

From January to April this year, 13 percent of all new mortgages were variable deals, the highest rate in a decade, according to UK Finance.

At that point, however, rates were still falling after the spike that followed the September mini-budget, and had not yet begun to rise again.

So is it worth taking out a variable mortgage in the current climate? We spoke to some brokers to find out what they advise their clients to do.

What are variable mortgage rates?

Variable rate mortgages include tracker rates, ‘discount’ rates and also standard variable rates. Monthly payments on all of these types of loans can go up or down.

Trackers track the Bank of England base rate plus or minus a fixed percentage.

For example, Nationwide offers a two-year tracker rate at the base rate plus 0.29 percent, currently 5.29 percent, to people with a minimum equity of 25 percent in their home.

Standard variable rates are the lenders standard rates that people move to when their fixed or other deal period ends, and they don’t take a new mortgage over to a new one.

These are subject to change by lenders at any time and will usually increase when base rates rise. However, they can rise by more or less than the Bank of England’s move.

According to figures from UK Finance, an estimated 773,000 borrowers have an SVR mortgage. Borrowers should be careful, as rates are often much higher than the lender’s fixed rate or tracker alternatives.

Discount rates are the lender’s SVR rates that are offered at a discount for a period of time, before returning to the main SVR.

Some of the best deals on the market include Chorley Building Society, which offers a discounted rate of 4.30 percent for those with 40 percent equity.

> Find the best mortgage deal with our rate finder

When is a variable mortgage interest a good idea?

A floating rate may have been a more obvious choice when interest rates fell. Borrowers can stay on an expensive variable rate for a relatively short time and then re-mortgage to a cheaper solution.

Whether a variable interest rate is a good idea today depends on how long it takes for the fixed interest rate to fall again.

Scott Taylor-Barr, financial adviser at Barnsdale Financial Management, says: ‘Whether or not a customer should consider a variable rate mortgage comes down to the answer to one fundamental question: if rates don’t fall and rise farther and longer than you predicts, can you still afford to keep your house?’

Sonia swap rates provide an indication of where the market believes the average mortgage rate will be at some point in the future.

Currently, the one-year swap rate is 5.93 percent and the two-year swap rate is 5.87 percent.

At present, financial markets expect the Bank of England’s base rate to reach 6% by the middle of next year and to remain at roughly the same level for the next 12 months.

Samuel Mather-Holgate, an advisor at Mather and Murray Financial, blames the bank for making it difficult to guess when interest rates will stop rising.

‘[Governor] Andrew Bailey seems to be doing everything he can to push the country into recession,” he says. ‘In recent months, many people opted for a variable with the idea that the final rate would be around 4.5 percent. That might have been the case under a different governor.’

Borrowers who decide that a variable rate is right for them are advised to shop around and talk to a mortgage broker before committing to a variable rate, as there are still less than five percent deals on the market.

Graham Cox, founder of Mortgage Broker Self-Employed Mortgage Hub, argues that some discount rate mortgages are below current fixed rate prices and so worth considering.

“Discount mortgages, which are discounted to the lender’s standard floating rate, are a good alternative to floating rates,” he says.

“They can be cheaper than the equivalent fix, and often come with lower prepayment fees too, meaning you can get out cheaper if a much better fixed-rate product is available in a year or so.”

Others, however, are more sceptical. Peter Dockar, chief commercial officer at mortgage lender Gen H says variable deals at the right time can help mortgage holders save money – but he personally doesn’t believe it’s the right time.

‘Because we don’t know how high mortgage rates will rise and how long they will stay there. Moving to a variable may seem attractive while fixes are high. But it’s a strange time,” he says.