The Bank of England’s Monetary Policy Committee voted to raise the base rate to 4.5% in May, meaning more mortgage pain for those on tracker rate mortgages.Tracker mortgage deals, as the name suggests, track the Bank of England base rate, plus a set percentage. For example, if your tracker deal is base rate plus 1%, your current payable rate will be 5.5% (the 4.5% base rate with another 1% added). Whilst trackers proved a popular option in recent months for some homeowners and buyers who wanted to sit on the fence to see what will happen with interest rates. Given that the base rate has risen 1% since January, those on this type of deal will have seen their costs increase significantly over this period. So is now the time to leave your tracker deal in favour of a fixed rate mortgage? Here’s what you need to know.
How fixed rate mortgage deals compare
Fixed mortgage rates soared after former Chancellor Kwasi Kwateng’s disastrous mini-budget last Autumn, peaking in November at an average of 5.90% for two-year fixed rates and 5.67% for average five-year fixes. Since the current Chancellor Jeremy Hunt reversed most of the mini-budget changes, fixed rates have come down, despite several increases in the Bank of England base rate. This is because fixed rates are predominantly determined by swap rates, which are the rates that lenders must pay other financial institutions to acquire fixed funding for a set term. Swap rates jumped following the mini-budget amid market volatility and fears that the tax changes announced were under-funded. According to L&C research, average two-year fixed rates stood at 4.35% at the beginning of May, and average five-year fixed rates at 3.98%, so they have fallen substantially over the past few months and in most cases are now cheaper than tracker rates.
Is now the time to switch from a tracker to a fixed rate?
Even though fixed rates are now much lower than they were a few months ago, many borrowers, especially those who locked into an ultra-low fix a few years ago, may well still consider current fixed deals a bit too high. However, given the fact it is taking longer than expected to dampen inflation, there is talk of further interest rate increases, which could see the base rate potentially rise further with some expecting it to peak at 4.75%. This would mean tracker rates would rise further still, so borrowers will need to think carefully about their own circumstances and whether now is the time to opt for the peace of mind a fixed rate could provide, either in the short or long term. Bear in mind that if you are currently on a tracker rate, and you’ve decided you want to move to a fixed rate mortgage, you first must check whether any Early Repayment Charges (ERCs) apply when you leave your current deal. Many tracker deals allow you to leave without penalty, but it’s worth reading your mortgage small print if you’re thinking about remortgaging to a fixed rate. If you’re not sure whether to stick with your current deal or remortgage elsewhere, seek professional advice on the options that are available so you can see how costs compare.
