Why ignoring tracker mortgages will cost you £££

The mortgage rate war of the summer has erupted again this month, with a raft of lenders slashing their rates and offering very tasty mortgage deals indeed.

The deals getting most of the attention – and column inches - are the uber-low five-year fixes that are now available again at under 3%.

Whatever you think will happen to interest rates and whatever your attitude to risk, there is no denying that a five-year fix at 2.99% is a simply stunning rate for those who can access it. Not only do you benefit from medium-term payment security, you also bag a very low rate of interest. In other words you can have your cake and eat it.

In light of this, and assuming you have a decent deposit or equity, these low five-year fixed rate mortgages are a no-brainer right?

Wrong!

Take a tracker

Just because fixed rates are very attractive right now, that doesn’t mean that they automatically trump trackers.

Admittedly, the fact that the fixed rate premium over trackers has reduced significantly certainly makes them very appealing.

But there are still plenty of reasons to go for a tracker and plenty of smart mortgage cookies out there that will seriously consider one over a fixed rate, especially if they can bag a competitive lifetime tracker deal.

Still the cheapest

The best lifetime tracker rates are still cheaper than the best fixed deals. The difference may not be as great as it was a year ago, but it is still significant and that becomes more important the larger your mortgage.

The cheapest five-year fixed rate mortgage for those with 40% upfront is a stonking 2.99%, from Chelsea Building Society. But HSBC’s lifetime tracker at 2.64% (base rate plus 2.14%) beats that. On a £150,000 mortgage it means a small difference of £27 a month; that’s £1,620 over five years.

But on a £300,000 the difference is a significant £54 a month, meaning the tracker saves you £3,240 over five years (assuming base rate doesn't move).

Of course, the tracker also has the potential to stay low beyond five years, as it mirrors the base rate, whereas the 2.99% five-year fix will revert to Chelsea’s standard variable rate, currently a high 5.79%. Importantly the tracker does also have the potential to rise at any point!

No tie-ins

If you take a five-year fixed rate you are committing to that mortgage, and your property, for five years. Your lender may tell you the deal is portable to a new home in theory, but they won’t guarantee it, and changing criteria could mean that you aren’t able to easily shift it over. This means that you could be stung for early repayment charges (ERCs) if you need to move house or redeem your mortgage.

These ERCs can be expensive – they vary, but on a typical five-year fix they might start at 5% in the first year and reduce annually to 1% in year five. On a £200,000 mortgage that is a sliding scale from £10,000 to £2,000 to escape your deal. Ouch!

Take a lifetime tracker mortgage and there are usually no ERCs, whether you leave in year one, year five or year 15 (there are a couple of notable exceptions to this – Woolwich and Bank of China – which charge modest ERCs).

With most lifetime trackers you can benefit from low rates now and, if interest rates do begin to rise, you are free to move elsewhere without penalty.

Get flexible

In the main, lifetime trackers tend to be very flexible. Many lenders allow borrowers to make unlimited overpayments without penalty, which is unusual in a market where most lenders allow a maximum overpayment of 10% of the balance a year.

This means that lifetime trackers are great for those who want to benefit from the cheapest rates, but who have more money available to reduce their debt more quickly and save on interest charges.

They also suit those with variable incomes, such as the self-employed or those on commission, who can overpay lump sums into their mortgage without penalty as and when they have the excess cash.

Rates set to stay low

Remember, there is a very good reason why lenders are currently launching such competitively priced long-term fixed rates.

Interest rates are expected to stay low, or even be cut further, over the next few years.

Because of this fixed rates need to be very competitive in order to tempt borrowers to go for them. After all, the downside risk of a tracker rate – which is the potential for it to rise in line with interest rates – is greatly reduced.

Of course there are no guarantees and the experts are often proved wrong. But the simple fact that lenders are offering cut-price fixed rates to lure borrowers away from variable rates – including trackers and SVRs – shows that they also think rates are set to remain low for the next few years at least.

For borrowers who simply can’t afford an increase in their monthly repayments, interest rate speculation is probably irrelevant. A fixed rate is the only way to get certainty of payments and since they are currently affordable it makes sense to get one.

For everyone else, a lifetime tracker is definitely worth considering. They are cheaper, more flexible, have fewer tie-ins and are unlikely to rise significantly in the next few years.

Below are 16 of the most tasty lifetime trackers, whatever your deposit:

Top term trackers

Lender	Rate	Fee	Maximum LTV	ERCs?
HSBC	4.49%	£599	90%	None
First Direct	4.59%	Fee-free	90%	None
HSBC	3.99%	Fee-free	85%	None
Woolwich	3.79%	£999	80%	1% for first 2 years
HSBC	3.69%	Fee-free	80%	None
Bank of China	3.18%	£1,295	80%	1% in first year only
First Direct	3.69%	Fee-free	75%	None
Hinckley & Rugby BS	3.69%	£1,090	75%	None
Santander	3.59%	£995	75%	None
First Direct	3.39%	£499	75%	None
HSBC	3.39%	Fee-free	70%	None
Woolwich	3.69%	£999	70%	1% for first 2 years
HSBC	3.09%	£599	70%	None
First Direct	2.79%	£999	65%	None
HSBC	2.99%	Fee-free	60%	None
HSBC	2.64%	£1,499	60%	None

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