Low tracker deals may not be good long-term option

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by Lin Freestone

Latest research has revealed that, during the past three months, mortgage lenders have more than tripled the margins they charge on tracker deals.

When the Bank of England base rate stood at 5% in October 2008, the average margin on a new tracker mortgage was 0.76% above base. According to moneysupermarket.com, current margins have risen to an average of 2.36% above base rate.

moneysupermarket.com, a price comparison website, has warned that each Bank of England cut is leading to a greater margin for the banks on trackers because they simply cannot afford to drop mortgage rates any lower. Any future upward correction of rates by the Bank of England could leave today’s new tracker customer in difficulty.

Mortgage borrowers, attracted by the low 1.5% interest rate and trying to decide whether or not to switch to a tracker, are advised to make sure they would be able to afford higher repayments if market forces dictate a sudden rise in the base rate.

With the base rate so low at the moment, an initial tracker rate of 3.86% does not look expensive. However, if the prospect of higher monthly payments is a concern, a fixed mortgage at a higher rate could offer more long-term security.

But some mortgage advisers consider that, for most people, taking a two-year fixed rate now will probably be a mistake as that this would mean having to review their mortgage deal again when rates may be rising.

At the end of the agreed term, and depending on how much further property prices fall and whether there are more lenders offering mortgages at high loan to values, they may well find that they can’t remortgage and will have no option but to stay with their existing lender.