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Base rate stays at 0.5% – should you get a tracker or fixed-rate mortgage?

Bank of England votes 6 to 3 to maintain base rate, but what does this mean for mortgages?

The Bank of England’s Monetary Policy Committee (MPC) today announced that the base rate will remain at 0.5% for at least another month.

But what does this mean for you, particularly if you’re considering taking out a mortgage?

Here, we explain how the base rate affects mortgages, and offer advice on whether today’s decision makes tracker deals more attractive for homebuyers and remortgagers.

  • If you’re searching for a mortgage that offers you protection against base rate rises, you can get expert advice by calling Which? Mortgage Advisers on 0800 2942 849.

Bank of England base rate remains at 0.5%

At yesterday’s meeting the MPC voted by 6 to 3 to keep the base rate at its current level. This follows a unanimous decision to do the same in May.

The base rate last changed in November 2017, when it rose from a record low of 0.25% to reach the current rate of 0.5%.

While it’s still possible that the base rate could rise this year, it will almost certainly remain significantly lower than the 5.25% base rate recorded in February 2007, before the financial crash.


How the base rate affects mortgages

The Bank of England base rate has an effect on both fixed-rate mortgage deals and variable mortgages.

Fixed-rate mortgages

With a fixed-rate mortgage, you pay the same rate of interest for the duration of the deal (usually two, three, five or 10 years). This means that if the base rate goes up and you’re already on a fixed-rate deal, you’ll be unaffected.

However, fixed mortgage rates on new deals will rise. This is because, when the Bank lends money to lenders, they pay interest determined by the base rate. This then affects SWAP rates – the rates banks charge when lending to each other – and costs are passed on to customers in the form of higher mortgage rates.

Even rumours about a base rate change can see SWAP rates rise and deals get more expensive.

Variable-rate mortgages

Tracker mortgages are a popular variable-rate product. These deals generally offer a standard interest rate plus the current base rate. So if your mortgage costs 1.49% + the base rate, and the base rate is currently 0.5%, that means your interest rate will be 1.99%.

If the base rate rises, the cost of your repayments will go up immediately.

Do tracker mortgages offer good value?

Tracker mortgages are getting cheaper, according to new data from Moneyfacts. The research shows that the average two-year tracker rate dropped to 1.92% this month – down 0.08% since March.

Moneyfacts attributes this to competition in the fixed-rate market reaching new heights, causing lenders to move some of their focus to variable-rate offers instead.

The number of tracker deals on the market has also increased, from 222 at the start of the year to 246 this month. This figure is still dwarfed, however, by the many thousands of fixed-rate products on the market.

Sainsbury’s Bank withdraws its tracker range

Earlier this week, Sainsbury’s Bank announced it would withdraw its residential tracker mortgages due to changing customer demand.

A spokesperson said that ‘after a review of the market alongside current demand from customers, we have decided to focus entirely on our fixed range’.

  • Find out more about how variable-rate deals work in our full guide to tracker mortgages

Can tracker deals absorb a base rate change?

Last month, we looked at the cheapest tracker deals at four different loan-to-value ratios: 75%, 85%, 90% and 95%.

Our research found that, while their current rates were attractive, a 0.25% increase in the base rate would make each market-leading product more expensive than the best fixed-rate equivalents. That means that, using this measure at least, trackers aren’t quite as attractive as they might sound on paper.

That’s especially the case in light of the Bank’s governor Mark Carney saying rates are ‘more likely to go up than not’ within the next year, and fellow Bank economist Gertjan Vlieghe claiming in May that rates could rise up to six times in the next three years.

Do you need to fix now to get a good deal?

Today’s base rate decision has offered a stay of execution for borrowers on variable-rate deals who haven’t yet moved on to a fix.

This is because waiting until the base rate actually changes can mean you miss out on the best deals.

Research conducted in December by Which? found that after the last base rate change, 135 deals – including four of the 10 cheapest two-year fixes – were withdrawn from the market.

How to get good mortgage advice

If you’d like to talk through your mortgage options in light of today’s announcement, you can get a free call back from an adviser by filling out the form below. Alternatively, if you want to talk right now, you can call 0800 2942 849.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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