Bestinvest: Avoid trackers and stick to fixed rate mortgages

Peter O’Donovan, Head of Mortgages at Bestinvest on why now is the time to fix your mortgage - whatever happens to the Base Rate: The most recent rate reduction has had a mixed reception from lenders. So far less than 50% of lenders have announced they will pass on all or some of the 0.5% reduction - so what does this mean in real terms for borrowers? Lenders are collaring their rates – for instance, Nationwide and Halifax have recently introduced a collar so no further reductions will be made to their rate.

Existing borrowers

Existing borrowers on a “tracker rate” should expect to receive the whole cut - but a number of lenders like Nationwide and Halifax have introduced a collar so no further reductions will be made to their rate. In any case, less than 50% of mortgages are on variable rates - so the majority of homeowners with a mortgage have not benefited from the cuts anyway.

Mortgage rates have hit the bottom, even though the base rate may have fall further. Margins new trackers are being raised to keep the minimum initial pay rate at around 4%. In the past three months fixed rates, have fallen only 1% against a 3.5% fall in the base rate.

Some existing borrowers are reaping the benefit - and we are still yet to hear the plans for borrowers with products linked below the base rate. But the likelihood is a collar rate at just over 0% will be introduced. These are loans - and people hoping for lenders to start paying interest back out to customers will be disappointed.

New borrowers

So for new borrowers what is the best course of action? People remortgaging may be tempted to still consider a tracker or even stay on the standard variable rate, which in a lot of cases is lower than the new tracker rates. Very few lenders will pass on further cuts - so now maybe a good time to consider a fixed rate. The fixed rates start at around 4% as well so there is no real difference in the initial pay rate. If you are looking at a lender who has publicly stated it won’t make further reductions, then it’s silly to go for a variable. For new borrowers looking to purchase the most likely major change in mortgage rates will be upwards - so fixing is something worth looking at. We don’t see rates increasing in the next few months - but if lenders feel there will be no further downward movement, they will start to increase fixed rates as these will be the most popular choice in a rising market. Over the long-term, fixing looks like a smart move for most borrowers and the best options available are with Alliance & Leicester at 3.69% for 2yrs and Woolwich at 4.69% for 5yrs.

For more information, visit bestinvest.co.uk