The dramatic cut in the base rate from 5% to 4.5% makes tracker mortgages an even more attractive option.
Following yesterday’s announcement, a homeowner with a £150,000 tracker mortgage can expect their annual mortgage repayments fall by almost £550 - and with some economists predicting rates to fall as low as 3% by late next year, it’s clear there’s far more savings on the way.
Unfortunately, the majority of households won’t benefit from this, with mortgage stats showing just 36% of homeowners currently on a tracker deal.
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Track your way to savings
In recent weeks, we have written a number of articles stressing that certain parts of the media were wrong in telling people to rush into locking down a fixed rate mortgage in the face of market uncertainty.
The security of a fixed rate deal is only worth paying for when the base rate looks like rising. However, analysts and economists are unanimous in their view that the only way is down for the foreseeable future.
This is not to say that fixed rates won’t also fall as a result of the recent base rate cut, but it does mean you will miss out on any further (and potentially massive) cuts in the coming year.
So if you are looking to remortgage now or in the near future, you should give very serious consideration to a tracker mortgage. Just take a look at the potential savings below.
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Tracker versus a fixed rate on a £150,000 mortgage
| Rate | Fee | Two year cost at current base rate (4.5%) | If base rate is cut to 4% | If rate is cut to 3% |
| 2yr fixed rate mortgage | 5% | £599 | £21,644 | £21,644 | £21,644 |
| 2yr tracker at base rate +0.6% | 5.10% | £599 | £21,854 | £20,814 | £18,815 |
As the table shows, you could save as much as £2,829 with a tracker mortgage if the base rate does fall as low as 3%.
Obviously it’s not yet clear what the banks’ new mortgage range of mortgage deals will look like once yesterday’s rate cut is reflected, as they may well decide not to pass on the full 0.5% to customers.
So the two mortgages above are merely an estimation of what a competitive tracker and fixed rate deal might look like after the cut is factored in. Whether the rates are slightly off is not important, the point of this table is to highlight how much you will save on a tracker compared to a fixed mortgage.
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First time buyers take note
While the cut is great news for homeowners who already own a sizeable portion of their home, first time buyers – and those with a poor credit history - should not expect to see mortgage rates plummeting quite so fast.
This is because banks are understandably still extremely risk averse, and will continue forcing such customers to pay a hefty premium.
The good news for FTBs is that, while mortgages may not be plummeting, house prices certainly are: Latest figures from Halifax show that the average price has fallen 13.3%, or £26,500, in the last 12 months. Amazingly, this is more than values fell during the entire 1990s property slump.
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