Cut your home loan bills with a base rate tracker

Despite the rush to fixed mortgages a variable deal could save you more cash

FIXED-rate mortgages are all the rage, with almost nine in ten borrowers opting to grab one before interest rates go up. But are they always the right choice?

Some mortgage experts now say base rate trackers could be a better bet for many borrowers – saving them thousands of pounds and helping them clear their loans years ahead of schedule.

‘The problem for borrowers is the best fixed-rate deals have already been withdrawn,’ says Aaron Strutt of mortgage broker Trinity Financial in Mayfair, Central London.

Researchers at Moneyfacts say the average five-year fixed-rate deal for big deposit or high equity borrowers is nearly 3.4 per cent – 0.25 percentage points higher than three months ago, with half a dozen lenders withdrawing good rates and replacing them with higher priced offers in the past two weeks alone.

The best tracker deals, however, remain unchanged and are starting to look increasingly competitive.

How they work

THE rate you pay on these mortgages tracks Bank of England base rate, so when it goes up the payments will rise, and when it goes down they fall.

The best-buy from Chelsea Building Society sets the payments at 1.34 percentage points over the base rate – currently 0.5 per cent – until 2016.

Several lenders have similar trackers that last for two years, at which point borrowers will have to move on to the costlier standard variable rate or find a new deal.

But there are also plenty of ‘life of loan’ trackers that you can stick with for the long term.

The advantages

LOW payments today are a useful early bonus. If you are remortgaging and have at least 40 per cent equity in your home then with an HSBC deal set at 1.49 percentage points over base rate for life, you start off paying just 1.99 per cent interest.

On a typical £125,000 loan that will cost you £62 a month less than the best comparable five-year fix set at 2.94 per cent from the same bank. And you can stick to the tracker for as long as you like to avoid paying £1,000 or more in remortgage fees in five years’ time.

Today’s long-term tracker deals are also unusual in not charging big early redemption penalties if you change your mind and switch to a different rate. If you opt out of a best-buy fix before it expires you may have to pay up to five per cent of your loan amount as a penalty. Opting out of a lifetime tracker can be fee-free.

Better still, base rate trackers do not usually have limits on the sum you can repay each year. Pay off the occasional lump sum, or make regular monthly overpayments while you can afford it, and you can help clear your mortgage far sooner than the standard 25-year term.

The risks

THE obvious risk is that trackers leave you dangerously exposed should interest rates soar. Some experts say you may need the base rate to stay at its current level for at least another year to make enough savings to compensate for the higher repayments you will face when rates do edge up.

As a guide, every 0.25 percentage point increase in base rate will add around £16 a month to repayments on a typical £125,000 loan.

With some economists predicting that the long-term ‘normal’ for the base rate is 3 per cent, today’s tracker fans should make sure they can afford to pay up to about 4.99 per cent on their loans.

Check what your payments will be at different rates by using the ‘Mortgage Affordability’ calculator at our sister website Thisismoney.

While the freedom to opt out of a tracker and choose a different deal penalty-free is a clear advantage, the downside is that there is no way of knowing what kind of alternative deals may be available when you decide to jump.

If the only choices are more expensive the total cost of the tracking adventure will be high.

Top deals

FIRST Direct, HSBC and Woolwich have long since dominated the market for best-buy trackers – but today it is also worth looking at deals from Santander, TSB, the Post Office and newcomer Tesco Bank.

Application fees vary, but broker London & Country Mortgages says set-up costs tend to be lower on trackers than on best-buy fixes, though this could change.