Is it time borrowers considered a tracker mortgage?

By Andrew Ferguson, Managing Director Buy-to-Let, West One Loans

There was a time – not so long ago, actually – when the humble tracker mortgage ruled the roost.

Back in 2009, roughly seven in 10 new mortgages were sold on a variable-rate basis, according to Bank of England data.

However, their popularity has plummeted since, with less than one in 10 borrowers plumping for one since 2019.

The reason for that is quite simple: fixed rates have been so low in recent years that it has been difficult to make the case for a variable rate product.

That trend is one that could be here to stay, especially as the Bank of England has just hiked rates to a 13-year high of 1.75%. I’d imagine most borrowers would see that and instinctively decide that the best option would be to fix their monthly repayments.

You can’t blame them for that and the reality is that, for most people, tracker mortgages won’t currently be a good fit.

But there will be some borrowers out there for whom a tracker mortgage is the ideal option – and it’s all to do with the expected path of interest rates.

There’s no escaping the fact that fixed rate mortgage rates have risen significantly over the past year.

Data from Moneyfacts shows that the average five-year residential fixed rate has just surpassed 4% for the first time since October 2014, rising 1.44 percentage points since December.

In the buy-to-let space, our research shows that the average landlord will have to pay 4.57% if they fix their repayments today – much more than they did a year ago.

It means that anyone opting to fix now will pay significantly more than they did before, unless they are lucky enough to have built up a decent amount of equity in their home.

And, unfortunately, fixed rate mortgages are probably only going to get more expensive in the short-term.

Markets are betting on Bank Rate peaking at 3% in 2023, which will inevitably feed into higher swaps rates and therefore more expensive fixed rate mortgages.

So, borrowers coming to the end of their current deal have a choice: do they lock in for, say, another five years at a higher interest rate or do they take a chance on a tracker mortgage?

That may sound counterintuitive, but there is logic behind the question.

You see, a glance at the overnight index swap rate curve suggests Bank Rate will peak next year before rolling back to 2.2% by the third quarter of 2025.

If that does actually happen, it is likely that those who opt for a tracker rate mortgage now will be better off over the medium-term, even if it means higher repayments in the short-term.

Of course, there is one obvious flaw in that argument: the direction of Bank Rate is fluid, and no-one can predict with accuracy where rates will be in three months, let alone three years.

But for borrowers who feel strongly that the Bank of England will have to embark on a series of economy-boosting rate cuts once inflation has been tamed, it might be a risk worth taking.

Another major benefit of tracker mortgages is that many of them come free of early repayment charges, meaning borrowers can fix at any time if they want to.

However, this is where the advice provided by you, the broker, to your clients will be invaluable.

It will be a long time before the tracker is the dominant product type in the market again. But for the right borrower, I’d argue they warrant consideration once more.