The rush towards tracker mortgages that began even before Thursday’s interest rate rise could well become a stampede after the Bank of England signalled that rates may be reaching their peak after 10 consecutive increases. It leaves those remortgaging right now in a big quandary.
While UK mortgage buyers have traditionally favoured fixed-rate deals with their set monthly repayments, about 1.7 million owner-occupiers holding mortgages are still on tracker deals, with monthly payments rising and falling according to the level of the Bank base rate.
Even before the Bank’s announcement, mortgage brokers were reporting a big jump in interest in tracker mortgages from people betting that interest rates have peaked.
“There’s definitely been an increase in interest in tracker rate options, particularly when fixed rates surged upwards after the mini-budget,” said David Hollingworth, an associate director at L&C Mortgages.
“Those borrowers that are comfortable with fluctuation in payments may like the potential for their mortgage to follow interest rates back down if inflation eases and the Bank feels it should stimulate a flagging economy over time.
“In recent years rates have been so low that there’s been no upside to a variable product when fixed rates were on par or even lower.”
On Thursday the Bank governor, Andrew Bailey, told reporters he had seen “the first signs that inflation has turned the corner”, suggesting that after a year of base rate rises aimed at tackling rocketing prices, an end to rising interest rates may be within sight.
Bailey also said a recession, though less severe than previously predicted, was still on the way – adding to the “peak rates” argument.
City analysts expect the Bank to raise interest rates again to 4.5% in the spring before a series of cuts next year brings it back to 3.5%.
This suggests there could be more pain to come for mortgage holders in terms of rising monthly payments. However, the outlook is better than after Kwasi Kwarteng’s mini-budget in September, when the City was forecasting that the Bank base rate would hit 6% by this spring.
For those in the “peak rates” camp looking to hedge their bets on interest rates over the next 12 months, Barclays offers a two-year tracker at 0.26% above the Bank base rate, allowing customers to borrow up to 60% of their home’s value.
It features a £999 fee but no early repayment charges, meaning the buyer could later opt to go back to a fixed rate at any time. If rates fell away again during the year, buyers would reap the rewards in significantly lower repayments.
“You don’t want to lock in over 5% for five years,” Andrew Wishart, a property economist at Capital Economics, told Bloomberg earlier this week. “People generally think that mortgage rates aren’t going to stay as high as they were in October and November for a long time. Certainly over a five-year period, the likelihood is that you will save money by being on a tracker.”
Despite this, Hollingworth said mortgage buyers should still take a good look at fixed-rate deals that have been falling rapidly in recent weeks because of a new price war.
“The best fixed rates on offer now are much lower than only a few months ago and many homeowners will still prefer to know exactly where they stand when it comes to their biggest outgoing. Five-year deals are closing in on 4.15% and Virgin has launched a 10-year fix at 3.99%,” he added.