Is now the right time to take out a tracker mortgage?
If you’re looking to take advantage of one of the cheapest mortgage deals in the UK, you might have to decide to take a tracker rate product. HSBC’s new deal at 0.99% offers a rock-bottom rate, but as it’s linked to the Base rate, could you find yourself paying more in the next couple of years?
We look at how tracker rates work, the HSBC deal, and what you should take into account when taking out a variable rate mortgage.
HSBC launch 0.99% tracker mortgage
In an era of unprecedented low mortgage rates, HSBC has recently launched the cheapest tracker deal on record.
The bank’s new product tracks the Bank of England Base rate plus 0.74% for two years, meaning you’ll currently pay 0.99%. It’s available to home buyers and remortgagers to a maximum loan to value of 60%. There’s a £999 fee (reduced to £749 if you’re an HSBC Advance customer).
One of the main advantages of the HSBC deal is that there are no early repayment charges. This means that you can pay off some or all of your mortgage at any time without penalty.
How do tracker mortgages work?
A tracker rate is linked to the Bank of England Base rate, currently set at 0.25%. Every time the Base rate changes, your interest rate and mortgage payments will also change.
The HSBC deal is at 0.74% above Base rate. So, if the Base rate were to rise by 0.5%, your interest rate would also rise by 0.5% and your repayments would rise accordingly.
Compare this to a fixed rate, where your payments are guaranteed for a specified period irrespective of any changes to the Base rate.
Can I expect my repayments to rise?
The Base rate has been at record low levels for years. It sat at 0.5% for over seven years, and was reduced to 0.25% in August 2016.
However, in recent months there have been hints that it may finally be set to rise for the first time since 2007. Last month, three of the eight members of the Bank of England’s influential Monetary Policy Committee – the body that makes interest rate decisions – voted to raise the Base rate.
However, any increase is only likely to be small and so even if the Base rate were to rise in the next two years, you could expect the rate payable on the HSBC deal to rise from perhaps 0.99% to 1.24%.
Is it a good time to take a tracker deal?
Research by Which? in 2016 suggested that around one in 10 borrowers choose a tracker rate. In an environment where interest rates are stable, they can offer excellent interest rates and, often, the flexibility to make additional repayments.
However, it is worth considering that the only way the Base rate is expected to go in the next few years is up. While it is likely to creep up, any rises in the rate would see your repayments on a tracker deal increase.
Moneyfacts data suggests that the average two-year tracker deal is cheaper than the average two-year fixed rate (1.82% compared to 2.26%) and so you may save money initially by choosing such a deal.
However, with many experts suggesting that the Base rate may rise in the next few years, choosing a tracker deal means that you will accept an element of risk that your repayments may increase.