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ON TRACK FOR A MORTGAGE CUT

Tracker mortgages should be the first choice of home loan

Wednesday August 20,2008

By Holly Thomas

WITH economic forecasts pointing towards interest rates dropping sharply next year, tracker mortgages should be the first choice of home loan, say experts.

“With mostly negative news on a daily basis, borrowers could be forgiven for not knowing whether to fix, track, cap or offset their mortgage,” said Drew Wotherspoon of broker Charcol.co.uk.

“Yet with the Bank of England revealing a marked increase in inflation, and an expectation of an equally marked decrease to come, it seems highly probable the bank rate will fall sharply in 2009.”

Wotherspoon said that a tracker would be the best choice for anyone who did not need the absolute certainty of a fixed-interest deal.

Nationwide has a two-year tracker at 5.68 per cent with a £1,499 fee for those borrowing up to 75 per cent loan-to-value (LTV) while those requiring a 90 per cent loan can get a 5.94 per cent interest rate from the Halifax with a £999 arrangement fee.

Melanie Bien, director of independent mortgage broker Savills Private Finance, said: “Tracker rates are falling now and if interest rates do fall next year, as we predict, those on a tracker will benefit further.

“Trackers on the whole tend to be more competitively priced than fixed loans. But you need to make sure you can afford to be wrong and be able to meet repayments if the rate increases.”

Fixed-rate mortgages have also been falling in recent weeks on the back of declining swap rates — the rates at which the banks borrow from each other.

Newcastle BS offers 5.65 per cent for two years for 75 per cent LTV — with a fee of £1,098.

Borrowers may take a tracker but leave themselves open to switching to a fix when rates fall.

Some lenders that allow borrowers to drop the tracker loan and lock into a fixed rate at any time, without penalty.

A new Nationwide study revealed this type of flexibility was increasingly important to borrowers. Eight out of 10 said they would be more interested than they would have been last year in a mortgage that let them switch products without penalty.

Nationwide reported economic events in the past year had affected mortgage holders’ attitudes to borrowing in other ways too. Some 64 per cent said the fee was just as important as the rate on offer.

Martyn Dyson, head of mortgages at Nationwide, said: “It is more important than ever for borrowers to shop around for the best mortgage deal overall and not to just the cheapest headline rate.

“Borrowers should consider the overall combination of headline rate, fee and the lender’s standard variable rate.”

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