HSBC has launched the cheapest tracker deal on record, but is now the right time to take a gamble on a variable mortgage?
HSBC’s new 0.99% tracker is available for home buyers and remortgagers, subject to a maximum loan-to-value ratio of 60% and a £999 fee (or £749 for HSBC Advance customers).
That means you’ll need either a 40% deposit or 40% equity in your home to qualify for this deal.
While a mortgage charging less than 1% might sound good at face value, tracker mortgages can be a risky business, especially with the uncertainty surrounding the Bank of England (BoE) base rate. Here’s how to decide whether a tracker is the right type of mortgage for you.
How do tracker mortgages work?
Tracker mortgages follow the BoE base rate, which is currently set at an historic low of 0.25%.
The HSBC deal adds 0.74% on top of the base rate (0.25%) for two years, meaning it’s currently available with a rate of just 0.99%.
While the base rate remains low, this deal outstrips much of the competition – but should it increase, home buyers would face higher monthly repayments.
Is the base rate likely to increase?
Quite possibly, yes. Until recently, it was thought that the base rate was unlikely to increase until next year, but it now seems more plausible that a hike could come sooner.
Base rate changes are decided by the Monetary Policy Committee, and last month three of its eight members voted to increase the rate.
If it does increase, it’ll may only increase slightly – perhaps from 0.25% to 0.5%. Home buyers with the HSBC deal would pay an interest rate of 1.24%, rather than the 0.99% currently available.
Should I get a tracker mortgage or a fixed-rate mortgage?
According to research we conducted last year, around one in 10 borrowers opt for a tracker mortgage.
While they carry a greater element of risk than fixed-rate deals, trackers can be attractive.
When the base rate remains low, a tracker could be a good idea for borrowers who are looking to overpay on their mortgage – provided they can get a deal that doesn’t include any penalties for doing so.
Both tracker and fixed-rate deals are at record lows
According to data from Moneyfacts, the average two-year tracker rate is 1.82% – somewhat cheaper than the 2.26% offered by two-year fixed rate deals.
While the average two-year tracker rate remains cheaper, the best deals (by introductory interest rate) are very similar for both fixed-rate and tracker mortgages.
This means that if you can access the best fixed-rate deal at your level of borrowing, a tracker might carry a greater risk than reward.
First-time buyers and tracker mortgages
While there are a few tracker mortgages out there for first-time buyers with small deposits of 5% to 10%, the rates aren’t particularly attractive.
With fierce competition in the mortgage market, a greater range of fixed-rate deals are available to first-time buyers with small deposits.
Without an enticing headline rate, trackers are unlikely to be the best option for many first-time buyers, as they lack the security of knowing how much your repayment will be each month
Find out more: read our guide to buying your first home