Tracker mortgages may offer lowest rates

Published 17th Jul 2009

Borrowers looking to take out a new mortgage may be better off opting for a tracker rate, which will rise and fall in line with the Bank of England base rate, rather than a fixed rate even though interest rates are at a historically low level.

Fixed rates have been rising in recent weeks, meaning many borrowers have missed the opportunity to lock into competitive deals. Brokers said fixed rates, particularly on longer term deals, were now pricing in such steep rises to the base rate that borrowers may end up paying too high a premium for the extra security these provide.

Ray Boulger at John Charcol, said five-year fixed rates were typically at least 2 percentage points higher than a comparative initial tracker rate.

This means the base rate would have to rise by more than that amount to make it worth paying for the fixed rate.

Boulger said there was now a stronger feeling that interest rates would remain low – although not necessarily as low as the current 0.5 per cent – for at least two to three years.

“Money market rates have fallen over the last month because of a reassessment by the market of how long it will take to climb out of the recession and hence how long interest rates will stay low,” he said.

This week, the Bank of England announced that inflation, as measured by the consumer price index, had fallen below its 2 per cent target for the first time in almost two years. The latest unemployment data also showed a sharp rise in people out of work.

Boulger said that lifetime tracker rates, which offer a premium over the Bank rate for the entire term of the loan, generally offer the best value.

HSBC is offering a lifetime rate of 2.24 per cent above Bank rate, which has a £999 fee, while Woolwich has a lifetime rate of 2.49 per cent with a fee of £1,499.

For shorter term deals, Alliance & Leicester has a two-year tracker rate of 2.59 per cent above Bank rate.

Source: ' FT '

View All Latest Articles