With many low interest fixed-rate mortgage deals due to expire this year, borrowers may be asking what to do next and considering whether a tracker mortgage is a good option.
A new report from theOffice for National Statisticsreveals more than 1.4 million UK households are set to face a significant rate rise when they remortgage in the coming months.
Given how much more expensive mortgage fixes are now, compared to a year ago, some people may be tempted to opt for a tracker – whose rates tend to be cheaper – as opposed to locking in for a set period.
We take a look at:
- What is a tracker mortgage?
- How often do payments on tracker mortgages change?
- What are the pros of tracker mortgages?
- What are the cons of a tracker mortgage?
- Which borrowers stand to benefit from a tracker – and which don’t?
What is a tracker mortgage?
Abase-rate trackerfollows the Bank of England (BoE) base rate – plus a margin on top.
Say, for example, you were paying interest of 4.5% before the base rate went up in February, your mortgage rate would have gone up in line with this, by 0.5% to 5%, to reflect the increase.
Tracker rates are transparent, unlike discounted variable-rate deals, which are linked to the lender’s standard variable rate (SVR). With a tracker, you know exactly what you will be paying after any base rate rise (or fall).
If you take out a fixed-rate mortgage, however, you don’t have to worry about your borrowing costs changing over the term of the loan, as the interest rate you pay will stay the same for a set number of years. This offers security, but for some, it could lead to higher payments.
How often do payments on tracker mortgages change?
Tracker mortgages – which you can take out for anything from two to ten years – move in line with the base rate.
This means that your monthly payments could rise as soon as next month if the bank rate goes up, as is expected in February, due to underlyinghigh inflation(currently at 10.5%), and strongwage growth.
The Bank of England votes on possible changes to the base rate roughly every six weeks, so potentially, the amount you pay for a tracker could change that often.
Why are tracker mortgages so relevant right now?
While mortgage interest rates have dipped slightly compared to the highs seen in the aftermath of themini-budget, they are still significantly higher than most borrowers will have previously been paying.
With household budgets set to be stretched even further by the cost of living crisis, those now needing to remortgage may be tempted to opt for a tracker, as opposed to fixing at the current levels.
Mark Harris from mortgage broker, SPF Private Clients, said: “Many borrowers are opting for trackers because fixed-rate mortgages are relatively expensive, following the fallout from the ill-fated mini-budget.”
And it’s not only people remortgaging who may be considering a tracker. The same is true of some first-time homebuyers worried about having to contend with high mortgage.
But for a first-time buyer, as with any borrower, it’s crucial to weigh up the pros and cons.
What are the pros of tracker mortgages?
- They are currently cheaper than fixed-rate deals.
- If the base rate is low, you should enjoy a relatively low mortgage rate.
- If you opt for a tracker with no early-repayment charge (ERC) for getting out of a deal before the end of its term. you will have the option to move over to a fixed rate if you later wish to.
- Most trackers do not have ERCs, so you can switch easily without facing a penalty.
What are the cons of a tracker mortgage?
- Costs can go up because trackers are linked to the base rate. When this changes – as it has constantly over the past year – it becomes harder to budget.
- With further rises in the base rate – which is expected to peak at about 4.5% in the middle of this year – trackers could become more expensive than the fixes currently on offer, especially if inflation is not tamed to the extent that policymakers hope (see below).
Is it a good idea to get a tracker mortgage now?
One of the reasons it might make sense to take out a tracker now is that the prime minister has vowed to bring inflation under control. If the government succeeds in realising this aim, the Bank of England will not need to continue hiking the base rate, which currently sits at 4%.
“Markets expect the Bank rate to level off at around 4.5% later this year,” says Sjaene Higgins of financial consultancy firm Wesleyan.
“This is good news, but it still signals higher costs on the horizon. And we’re not expecting a return to anything like the record lows we’ve seen over the past decade. Rates of 3% to 4% will probably be our ‘new normal’ for some time to come.”
Lenders are already tweaking their fixed rate deals to reflect this.
Following the previous rise in the base rate, Karen Noye, mortgage expert at the wealth manager Quilter, said: “Halifax relaunched a handful of tracker products aimed at first-time buyers and those looking to remortgage.
“Its two-year rates for homebuyers range between 4.09% and 4.59%. This compares with rates of between 5% and 6% for fixed rates of the same term.”
That said, no one can predict with any certainty what will happen in this volatile mortgage market. And, if interest rates do end up rising further, so will your monthly payments.
Rachel Springall from data firm Moneyfacts added: “Tracker mortgages can be more appealing to borrowers looking for flexibility with their loan, but you need to be aware that a base rate tracker can go up as well as down, and there is still room for the Bank to increase rates in the months to come.”
Which borrowers stand to benefit from a tracker – and which don’t?
If you are happy with the idea of your monthly payments potentially going up – at least in the short term – and confident that you could still afford the cost, now could be a good time to consider a tracker.
That said, if you think you would struggle to pay your mortgage should rates continue to rise, or you are looking for security in your monthly repayments, then a fixed-rate mortgage, which helps with budgeting, might make more sense.
Equally, one further option to consider is a tracker with no early repayment charge.
Harris said: “This gives you the flexibility to be able to move over to a fixed rate once pricing on these becomes more palatable.”
More tracker mortgages on offer
As demand for tracker mortgages increases, we are starting to see lenders launch more of them, both for first-time buyers and those remortgaging.
Halifax, for example, is offering tracker mortgagesfor the first time in four years.
But these deals have their downsides: they are vulnerable to increases in the base rate and, as a result, there is a risk they could exceed the fixed rates currently on offer.
Will house prices drop?
The average UK house price fell for the fourth month in a row in December, according to lender Halifax, leading to an overall slowing of the market.
Some experts are predicting that the spike in the cost of mortgage borrowing could lead to a dampening in demand for houses, and cause the UK property market to crash – though opinion remains very divided.
Also, if there is a big downturn, the feeling is that this will be less severe than those experienced in the past. See our article on what’s happening to house prices.
Will mortgage rates go down?
In 2023, the base rate is expected to increase to between 4% and 5%, though this could fluctuate, depending on the state of the economy.
But previous expectations of the bank rate peaking at 6% or higher are now looking wide of the mark.
According to Moneyfacts, despite recent increases in the base rate, mortgage rates are currently falling.
Its analysis shows both the average two-year and five-year fixed rates fell month-on-month for the second month running in January 2023, down to 5.79% and 5.63% respectively, following 13 consecutive months of rises up to November 2022.
Springall said: “It is anticipated that fixes will fall further in the months to come to entice new business.”
How to work out what type of mortgage is best for you
When researching deals to try and make the right decision for your borrowing needs, make use of our handymortgage comparison calculator.
If you are unsure about the best option for your individual circumstances, it may be worth seeking professional advice from an independent, whole-of-market broker.
This can be especially important in a fast-changing market. It could also be useful if you need a specialist product, such as aself-employed mortgage.
Getting approved can be tricky, so read ourtips to help you get a mortgage.
We’ve also got plenty of information on when it’s best to overpay your mortgage.
Ask for help
Crucially, you must never miss a mortgage payment. If you are struggling to make ends meet, speak to your lender at the earliest opportunity. There’s also free help available from organisations such asStepchange, National Debtline and Citizens Advice.
FAQs
Can you make overpayments on a tracker mortgage? ›
You could make overpayments
You could pay more than your agreed monthly payment – we'll tell you if there are any overpayment limits or early repayment charges before you take out any specific mortgage.
A tracker mortgage gives you the freedom to leave at any time with no Early Repayment Charge. This rate tracks a percentage above the Bank of England Base Rate (BBR), so your monthly repayments will go up or down depending on how the BBR moves.
Is the mortgage panic over? ›The mortgage panic is over – but here's why there's plenty of pain to come.
What is mortgage tracking? ›A tracker mortgage is a type of home loan where the interest rate charged on the loan tracks that of another publicly available rate, typically the interest rate set by the European Central Bank.
Should I stay on my tracker mortgage? ›If you are on a tracker mortgage that charges over 1% above the ECB rate you should think about fixing your tracker as you are already paying more than you could on a fixed rate. If you are on a tracker mortgage that charges less than 1% above the ECB rate, it still might make sense for you to move.
Will mortgage interest rates go down in 2023? ›National Association of Realtors (NAR) senior economist and director of forecasting, Nadia Evangelou: “If inflation continues to slow down—and this is what we expect for 2023—mortgage rates may stabilize below 6% in 2023.”
Is tracker mortgage better than fixed? ›Tracker mortgage interest rates are usually cheaper than fixed rates – but don't always stay that way. Fixed rates are often more expensive initially because you're paying for the security of having fixed mortgage repayments for a set period of time.
Are tracker mortgages going up? ›On 2 February 2023, the European Central Bank increased its ECB Refinancing Rate by 0.50%. As a result we will make these changes to our rates: Tracker mortgage rates will increase by 0.50% for all Tracker and Buy to Let mortgages that are linked to the ECB rate.
How much interest do you pay for a tracker mortgage? ›If you have a tracker mortgage, the amount of interest you pay on your mortgage might be the base rate, plus or minus a certain percentage. So if the base rate in the example increased to 1%, the rate you pay would go up to 2.5%.
Is a mortgage crash coming? ›While the housing market on a national scale has seen prices decline since mid-2022 amid high interest rates, experts are noting that a sudden and abrupt housing market crash is unlikely, based on current market conditions.
What are three common mortgage mistakes? ›
- Not Getting Preapproved. ...
- Not Checking Your Credit Score First. ...
- Not Considering Mortgage Insurance. ...
- Not Shopping Around for a Mortgage. ...
- Not Keeping Closing Costs and Fees in Mind.
In the longer term, Savills expects house prices to grow by 1% in 2024, followed by a larger increase of 7% in 2026 if mortgage lenders cut rates over the next 12 months and the base rate declines from mid-2024 as inflation falls.
Why is a tracker mortgage good? ›Tracker variable rate
The rate is set at a fixed margin above the ECB rate so as ECB rates rise or fall, so does your rate with them. Tracker mortgages were introduced in Ireland in the late 1990s and became extremely popular because they guaranteed customers the best possible mortgage rate.
How long can I get a tracker mortgage for? You can generally get a tracker mortgage for an introductory period, usually between 1 – 5 years or you can get a lifetime tracker, which will last for as long as your mortgage.
Can I cancel tracker mortgage? ›What happens if I want to end a tracker mortgage early? Lenders offer tracker mortgages with the understanding that you'll last the full term. So if you want to switch to a different mortgage before the term is up then you might have to pay an early repayment charge.
What is the most important mortgage to avoid? ›- You may not be able to afford the significantly higher monthly payments when the interest-only period ends. ...
- You may not be able to refinance if you have little to no home equity.
Recommendation: If your mortgage has a low margin, of 0.6% points to 0.75%, then it could still be worth holding onto your tracker. However, if your tracker mortgage is at higher margin, say 1.25 % or above, then giving up your tracker in favour of a fixed rate is worth having a conversion over.
Can I sell my house with a tracker mortgage? ›Yes. If you're an existing AIB customer with a tracker interest rate mortgage, you can keep your tracker mortgage even if you sell your current home and move to a new property.
How high will the interest rates go up in 2023? ›In its fiscal forecast, published in November 2022, the OBR predicted that the Bank Rate would rise from 1.6% in Quarter 3 2022 to 4.8% in Quarter 3 2023 and 4.5% in Quarter 3 2024.
How high will interest rates go in 2023? ›In the past 12 months alone, the Fed has hiked rates seven times to combat rising inflation. As of January 2023, the federal funds rate is 4.43%. However, the FOMC predicts that it could continue to rise and peak at around 4.9% in 2023.
How high will interest go in 2023? ›
The Fed's key benchmark borrowing rate is projected to rise another three-quarters of a percentage point in 2023, hitting a 17-year high of 5-5.25 percent from its current 4.25-4.5 percent level, according to the Fed's median projection from December.
Who is the best mortgage company to deal with? ›- Best for lower credit scores: Rocket Mortgage.
- Best for flexible down payment options: Chase Bank.
- Best for no fees: Ally Bank.
- Best for flexible loan options: PNC Bank.
- Best for saving money: SoFi.
You can fix your mortgage between one and ten years. The most popular options are two-year or five-year fixed-terms. A longer fixed-rate deal may seem like a no-brainer at first, but wait! There are reasons to choose a shorter fixed term on your mortgage.
Will mortgage rates improve in 2023? ›With the BOE base rate at 4% and the market now pricing in 2 year fixed mortgage rates to rise to around 5.4% by the middle of 2023, you should consider fixing your mortgage if you are worried about how high interest rates might go and whether you can keep up your mortgage repayments.
What is the best frequency to pay mortgage? ›Monthly is the most common payment frequency. Lenders use this standard payment to calculate the amount you would pay on other schedules. In the example above, you'll pay $2,908 once per month for your 5-year term. If your interest stays the same, it will take the full 25 years to pay off your mortgage.
Does IRS track mortgage interest? ›Your mortgage lender will report to the IRS the total amount of interest you paid on your mortgage loan. If you paid any "points" when you closed your loan, the lender will report those, too.
How many points does a mortgage affect credit score? ›A New Mortgage May Temporarily Lower Your Credit Score
When a lender pulls your credit score and report as part of a loan application, the inquiry can cause a minor drop in your credit score (usually less than five points).
'While fixed rates have improved compared to the end of last year, they remain a lot higher than they used to be. The base rate increased to 3.5% towards the end of 2022 and more rises could be on the way which will make tracker rates more expensive. Discount rates may also rise further. '
Will there be a housing market crash in 2023? ›Most experts do not expect a housing market crash in 2023 since many homeowners have built up significant equity in their homes. The issue is primarily an affordability crisis. High interest rates and inflated home values have made purchasing a home challenging for first-time homebuyers.
Will 2023 be a good time to buy a house? ›The combination of persistent buyer demand and low inventory has driven property prices up. There are fewer sellers, so prospective buyers need to contend with higher housing prices. As such, if you buy a home in 2023, you're likely to pay a premium.
What should you not do with a mortgage? ›
Avoid opening new lines of credit, closing credit lines, co-signing on loans, or making major purchases with credit cards before or during the mortgage loan process. Whatever your finances, be sure to include all debts and liabilities on your mortgage application. Honesty is always the best policy!
What is the 3 7 3 rule in mortgage? ›Timing Requirements – The “3/7/3 Rule”
The initial Truth in Lending Statement must be delivered to the consumer within 3 business days of the receipt of the loan application by the lender. The TILA statement is presumed to be delivered to the consumer 3 business days after it is mailed.
- Don't change employers, quit your job, or become self-employed.
- Don't take on additional long-term debt, such as buying a car or furniture for your new home. ...
- Don't increase your use of credit cards or fall behind on any payments.
- Don't change financial institutions.
Will interest rates go up or down? An interest rate forecast by Trading Economics as of 3 February predicted the Fed Funds Rate would hit 5% in 2023, before falling back to 4.25% in 2024.
Will mortgage rates drop again in the future? ›Mortgage rates are likely to fall even farther in 2023, housing economists predict. Greg McBride, CFA, Bankrate chief financial analyst, expects 30-year mortgage rates to drop to 5.25 percent by the end of 2023.
Will interest rates fall again? ›Prediction: Rates will drop
At the end of 2022, inflation was 6.5% compared to 7.0% in 2021. Lower inflation, smaller interest rate hikes by the Fed, and growing recession fears will push rates down even further in February.”
Tracker mortgages are generally cheaper to begin with than fixed rates. This is because fixed rates offer security against a rising base rate, whereas trackers can see monthly repayments rise.
What is tracker interest rate? ›What is a tracker mortgage? A tracker rate mortgage, unlike a fixed rate mortgage, means your interest will rise and fall in line with another interest rate – typically the Bank of England's base rate – for a certain period of time. This is usually two or five years.
Can you change a tracker mortgage at any time? ›If you're on a tracker deal, the SMR or the BMR, you can apply to switch at any time without paying an Early Repayment Charge.
How often does a tracker mortgage change? ›Tracker mortgages generally follow the Bank of England Base Rate (BOE Rate) with a set margin on top. This means that every time the BOE rate changes your mortgage rate will alter by the same percentage within 30 days (on most products) and your monthly payments will go up or down accordingly.
When should you get a tracker mortgage? ›
Tracker mortgages
Tracker mortgages usually track above the base rate. For example, a tracker mortgage might track at the base rate plus 1% – so if the base rate is 3% the tracker rate will be 4%. This means tracker mortgages are popular in times of low or falling interest rates (which isn't the case right now).
Many major insurers offer discounts of upwards of 30 percent on insurance costs to businesses that implement tracking solutions.
Can you end a tracker mortgage early? ›Tracker mortgage deals are usually agreed on for a set period. Because of this, if you want to switch to another deal or pay off your mortgage early, you will probably have to pay an early repayment charge (ERC). If fees apply, it's up to you to decide whether you're happy to pay an ERC to change mortgage deals.
Is a tracker mortgage a repayment mortgage? ›A tracker mortgage is a type of variable rate mortgage which "tracks" a base rate – usually the Bank of England's base rate. If you get a tracker mortgage, your mortgage repayments (including the interest you pay on your mortgage) could change every month.
How do I know if I was overcharged on my tracker mortgage? ›It is likely you will receive an initial letter informing you they have been overcharging you, but not telling you exactly how much they overcharged you. Once the bank has reviewed your account, you will receive a follow-up telling you how much they owe you.
Will I lose my tracker mortgage if I remortgage? ›When you get a new mortgage loan, you will be able to get Tracker Retention only on the balance that is left on your existing tracker mortgage loan. Any additional mortgage amount that is needed will then be based on AIB's current new business rate.
What are the benefits of a tracker mortgage? ›The most obvious advantage of a tracker-rate mortgage is that if the base rate falls, so will the cost of your repayments. If the base rate falls by 0.25%, the interest rate you'll pay on your mortgage will typically also fall by 0.25%, resulting in lower repayments.
Do mortgage lenders watch your Bank accounts? ›Do mortgage lenders look at savings? Yes, a mortgage lender will look at any depository accounts on your bank statements — including checking accounts, savings accounts, and any open lines of credit.
Can I change my tracker mortgage? ›If you're on a tracker deal, the SMR or the BMR, you can apply to switch at any time without paying an Early Repayment Charge.
How much compensation will I get for tracker mortgage? ›Elsewhere, the average compensation and redress payments from the three lenders were outlined. Average compensation paid to AIB customers so far is up to €6,885 while redress payments average €39,213. The average Bank of Ireland compensation is €3,404 and the redress is €17,330.
When did banks stop offering tracker mortgages? ›
Irish lenders stopped issuing tracker mortgages — where interest rates are typically set at a one percentage point premium to the European Central Bank's main lending rate — in 2008 as their own funding costs jumped amid the global financial crisis.
Does paying extra on mortgage affect credit score? ›Key points. Paying off a mortgage is unlikely to cause a huge change to your credit score. In some cases, paying off a home loan could actually result in a minor credit score hit.