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18 May 2019

Tracker mortgage rates tumble: is now the time to gamble on a variable-rate deal?

Discover the pros and cons of tying your mortgage to the base rate

Tracker mortgages are getting cheaper, with the number of products available to borrowers up by nearly 10% in the past month and the average rate on a two-year deal dropping to almost 2%. But is it really time for borrowers to ditch the safety of a fixed-rate deal?

Whether you're buying a home or remortgaging, it's a great time to secure a good deal on a home loan, with attractive mortgage rates available across the board.

And while many borrowers are settling for the comfort of a longer-term fix while the going is good, cheap tracker mortgages - which vary in cost based on the Bank of England base rate - are dropping in price and creeping up in popularity.

Here, we explain the pros and cons of trackers and offer advice on whether you should gamble with your mortgage rate.

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Rates fall on tracker mortgages

New data from Moneyfacts shows that the average two-year tracker mortgage rate has fallen to just 2.02%.

This drop has been attributed to increased competition between lenders, with the number of tracker mortgages rising from 185 to 202 in the space of a month, up by 9%.

Tracker mortgages follow the Bank of England base rate (currently 0.75%) plus a margin, so if a tracker is set at the base rate plus 1.5%, the rate you'll pay will be 2.25%. A 0.25% base rate increase would see this rise to 2.5%.

As with fixed-rate products, the rate of increase on a tracker mortgage is set for a specific period. The vast majority of tracker mortgages have two year introductory terms, though a handful of three and five-year deals are available.

Find out more:discover the pros and cons of tracker mortgages

Fixed-rate mortgages v trackers

Trackers are riskier than fixed-rate mortgages, because if the Bank of England increases the base rate, your monthly repayments will increase, too.

This means that lenders must offer tempting rates on trackers that counteract this element of risk. The current average rate of 2.02% on a two-year tracker is the lowest we've seen since September last year.

The graph below shows that the gap between the average rate on a two-year fix (2.47%) and a two-year tracker (2.02%) is nearly half a percent, meaning that (theoretically at least) trackers should be able to comfortably absorb at least one increase in the base rate.

Best rates on fixed and tracker deals

But how much stock can we really place on average rates? After all, the average for two-year trackers is only based on around 200 deals, while the average for two-year fixes is based on nearly 2,000.

In the tables below, we've instead looked at the best initial rates currently available on two-year fixes and trackers at three popular loan-to-value (LTV) levels - 60%, 75% and 90%.

60% LTV

Mortgage typeLenderLowest introductory rateRevert rateAPRCFees
Two-year fixHalifax1.35%4.24%3.8%£999
Two-year trackerHalifax1.29% (BR+0.54%)4.24%3.8%£999

Rate gap: 0.06% in favour of the tracker

75% LTV

Mortgage typeLenderLowest introductory rateRevert rateAPRCFees
Two-year fixHalifax1.47%4.24%3.8%£995
Two-year trackerHalifax1.37% (BR+0.62%)4.24%3.8%£999

Rate gap: 0.1% in favour of the tracker

90% LTV

Mortgage typeLenderLowest introductory rateRevert rateAPRCFees
Two-year fixNatWest1.79%4.24%3.8%£995
Two-year trackerAccord1.94% (BR+1.19%)4.25%4.3%£995

Rate gap: 0.15% in favour of the fix

Source: Moneyfacts. Remortgage-only deals excluded. 15 May.

Could the cheapest deals absorb a base rate rise?

As you can see, the gap in initial rates on the cheapest deals can be negligible at best, and for borrowers at 90% LTV it's already cheaper to get a two-year fixed-rate deal than a tracker without factoring in any future base rate increases.

At other LTVs, a tracker might offer lower monthly payments than a fix right now, but none of the best rates shown above could absorb a 0.25% rise in the base rate, as shown in the charts below.

Is the base rate likely to increase?

That's the million-dollar question. The Bank's nine-strong Monetary Policy Committee votes on whether to change the base rate each month, and this month it voted unanimously to keep the rate at 0.75%.

At the moment, the signs are that an imminent rise seems highly unlikely, and Santander's chief economist Francis Haque says we're unlikely to see a rise this year.

But with uncertainty around Brexit, things could change - meaning borrowers considering a tracker mortgage should think carefully before jumping in.

Darren Cook of Moneyfacts says: 'Markets are forecasting just a single interest rate increase by 2021, but with current economic conditions so unpredictable, this timescale may shorten and variable mortgage rates could increase sooner as a consequence.

'Therefore, those considering a variable rate tracker mortgage should always factor in any rate rises that could affect whether they can afford the monthly repayments for the length of their term.'

What happens if the base rate falls?

What goes up can also go down, but a fall in the base rate wouldn't necessarily give you a cheaper deal on a tracker mortgage.

That's because many tracker deals have 'collars' inserted into them, meaning that the rate you pay can't drop below a set amount, even if the base rate falls.

And with rates currently at a low level, most lenders set their collar at the current rate - meaning the headline rate you see will be as good as it gets.

Find out more:get to grips with how interest rates work in our guide on the base rate and your mortgage.