The Bank of England base rate has now been on hold at 0.50% for seven years, so it would be fair to assume that variable rate tracker mortgages – which typically follow base rate movements – have also remained static. However, our latest research shows that this is not the case, with average tracker mortgage rates having risen notably in the last six months, which suggests that other factors must be at play.
The figures show that the average two-year tracker mortgage rate has increased by 0.06% since November 2015, up from 1.98% to 2.04%, and it's risen by 0.02% in the last year, too. The lowest-priced deals available have been particularly impacted by rate increases, as the table below shows, and at the same time, product availability overall has reduced considerably.
Charlotte Nelson, finance expert at Moneyfacts, said that the increase in tracker rates is a clear sign that the link between base rate and mortgages has been broken. "There has been no rise in the Bank of England base rate and yet the lowest two-year tracker mortgage rate on the market has risen from 1.04% to 1.28% in just six months," she said.
"This could be due external economic threats such as unemployment, wage increases and a decline in interest in this type of mortgage. Indeed, CML figures show that the percentage of tracker mortgages taken up has fallen from 9% to 7% in just one year, which suggests that the appetite for this type of product has waned in favour of deals that boast greater security."
This means that lenders have begun to focus more attention on the fixed rate sector of the mortgage market, which has in turn led to declining tracker mortgage product numbers and fewer low-rate deals.
Having said that, the lifetime tracker market still appears to be benefiting from rate reductions, and as Charlotte points out, "tracker mortgages do have advantages that could suit the right borrower. For instance, the majority of lifetime tracker mortgages have no early redemption charges, which gives borrowers a fair amount of flexibility".
This kind of flexibility can also be achieved by remaining on a standard variable rate (SVR), but this could prove to be more costly: our calculations show that those who choose the average lifetime tracker mortgage would be £190.38 a month better off than if they were sitting on the average SVR of 4.81% (based on a £200,000 mortgage over a 25-year term on a capital and interest repayment basis), so it could still pay to consider this kind of mortgage if your budget can cope with a measure of uncertainty.
Indeed, tracker mortgages may also prove cost-effective over a shorter term, too: using the same figure as above, borrowers would actually be £595.92 a year better off if they opted for the average two-year tracker mortgage compared with the average two-year fixed rate deal, which currently has a rate of 2.54%.
However, despite the potential cost benefits, a tracker mortgage should not be taken without consideration, as Charlotte concludes: "A key question for any borrower when considering such a deal is whether or not they could handle a rate increase if base rate were to rise. The timing of such a rise is still uncertain, but borrowers should ensure that they are prepared for this eventuality. If they are unsure, they would be wise to get independent financial advice."
Think a tracker mortgage is for you? Compare the top variable rate mortgage deals available
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