Mortgage rates dominated the news headlines last year, with steep increases in interest rates, trying to find some clarity in the mortgage market has proven difficult. For some time, many people have preferred the safer option to fix their mortgage, with the knowledge that mortgage rates were generally running level, but the same cannot be said for mortgage rates in 2022 and now in 2023.
The Office for National Statistics has published a report revealing that 1.4 million UK households are set to face a significant rate rise when they remortgage in the coming months, this is due to many low-interest, fixed-rate mortgages due to expire this year and given the sharp rise in fixed-rate mortgage costs compared to a year ago, many people are now looking for alternatives, such as tracker mortgages.
What is a tracker mortgage and how does it work?
Tracker mortgages are transparent and offer the homeowner a clear view of exactly what they are paying after any base rate rise or fall. A tracker mortgage follows the Bank of England base rate and adds a margin on the top, so like in December, when the base rate increased, your mortgage rate would also increase in line with this, by 0.5% to 4.5%. In contrast to a fixed rate mortgage, which has been a more popular option up until recently, where you can find some security in remaining at the same rate if the base rate rises, you can also fall victim to higher payments if the base rate drops, which is something that people on tracker mortgages can take advantage of.
You can take a tracker mortgage out for anything from 2 to 10 years but something that could potentially put people off is that, though it moves in line with the base rate, this could change as often as 6 weeks, as this is how often the bank of England reviews and votes on possible changes.
What will happen to fixed-rate mortgages in 2023?
There is no way to be certain what will happen to fixed-rate mortgage deals this year, the only possible way to gain some insight is to look into past trends. Interest rates soared in December 2022 to 6.55% for a two year fixed deal, the highest rise in just under a decade. This was affected by the rise in the Bank of England base interest rate in order to combat inflation. However, since then, rates have fallen to sit around 5.5%, still not ideal and as inflation still remains high, it could mean that future increases to the base rate are likely, therefore, increases to fixed-rate mortgages are also likely.
Why are tracker mortgages becoming so popular?
With households struggling to keep up with the rise in inflation and budgets stretched even further by the cost-of-living crisis, the thought of having to remortgage now, amid the chaos of the economic climate can seem extremely overwhelming. Even though interest rates have dipped slightly compared to the aftermath of the mini-budget, they are still significantly higher than what most borrowers have been paying previously.
Due to this, many borrowers have started to consider tracker mortgages, with fixed-rate mortgages being relatively expensive, this is true of both remortgagers and first-time buyers. The idea that households can have some modicum of control over their mortgage payments is a small slice of relief from the high-interest rates offered through fixing. As mentioned above, a tracker mortgage offers some transparency as to what homeowners will be paying each month.
Positives and negatives of a tracker mortgage.
As with anything to do with money, it is always a good idea to weigh out the positives and negatives of each situation and the impacts each will have financially on your family. Going with the safer option, which poses less risk is always the better route to go down. Let's take a look at some of the positives of tracker mortgages at present.
Positives of a tracker mortgage:- They track the Bank of England base rate, meaning that if this is low then you should be able to enjoy a relatively low mortgage rate
- be able to enjoy a relatively low mortgage rate At present, they are cheaper than opting for a fixed-rate deal
- Tracker mortgages without an early repayment charge (ERC) give the option to move over to a fixed rate at a later date
- It’s easy to switch to a fixed rate mortgage if you so wish with tracker mortgages as most of them do not have early repayment charges
- Costs can fluctuate due to the link to the Bank of England base rate. If it drops then this is a bonus but you are also subject to if it rises, which makes it harder to budget and for people that have taken out a fixed rate mortgage, they won’t see this increase.
- The base rate is set to rise again in the middle of this year to 4.5%, this could mean that trackers become more expensive, especially if inflation is not tamed.
Is now the best time to get a tracker mortgage?
The next rise due in interest rates around the middle of this year will see interest rise to 4.5%, which is lower than originally thought. The government has also vowed to bring inflation under control, which should see the Bank of England base rate plateau, so considering this, now may be a good time to take out a tracker mortgage.
With tracker mortgages offering far more flexibility and appeal to remortgagers and first-time buyers, care still needs to be taken as base rate trackers can increase and decrease in line with the base rate and with much uncertainty in such a volatile mortgage market now, there is still room for the Bank of England to increase its rates in the months to come.
How can a mortgage broker help?
In times of uncertainty such as these, it's important to keep on top of your mortgage needs and to make decisions that work for you and your family. It can be extremely confusing trying to navigate the pros and cons of financial advice and a feeling of overwhelm can quickly take hold. By speaking to an independent mortgage expert, we can take the effort out of navigating the confusing mortgage market and help guide you through the process, helping to select the best deal for you.
Source: Money Saving Expert & The Times
