Tracker mortgages are now more expensive and the best deals in mortgages are likely to be fixed rates.
In early October I advised grabbing a tracker mortgage fast following a half percent cut in base rate. Now, after another 1.5% cut in base rate, you can barely get a tracker and most lenders have hiked their profit margins.
Three weeks ago, you could get a tracker at 0.5% to 0.75% above base rate. Today, the margin is more like 1.5%, though most of the 30-plus lenders who withdrew all their tracker mortgages last week have yet to disclose their new terms.
Abbey, Nationwide, Woolwich and Halifax had already raised tracker rates by 0.5% before the 1.5% fall in base rate. They will probably increase their margin again on their new tracker mortgage products. The typical offer on trackers is going to be base rate plus 1.5% or 2%.
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Only for new customers
This won’t affect you if you have a current tracker mortgage, as about one in four borrowers do. But the terms usually last only for a specified term, and when that ends you have to renew - on the new and higher rates.
Young journalists on the newspapers are getting worked up about this, but historically, 1.5% over base rate is about the average for mortgage lending profit margins. In recent years, during the great boom, competition got so intense that lending margins shrank to their lowest levels in living memory. Now they’re reverting to normal levels. Bargain-priced mortgages are no more.
But that’s only true of tracker mortgages and mortgages linked to lenders’ Standard Variable Rates (SVRs). Here the lender aims to make a profit over their own cost of funding, either from deposits or the interbank market. Interbank rates are still well above base rate, so banks that are using money markets to raise money aren’t making much of a profit at base rate plus 1.5%. Of course as and when interbank rates fall they will make big profits.
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Fixed rates are still falling
Fixed rates are priced differently. There’s a big ‘swaps’ market in which lenders can convert deposits they’ve raised at variable rates into fixed rates. Swap rates have been falling steadily in the last month and two-year swaps are now 3.4% as against 4.3% a month ago and 5.5% six months ago. Five-year swaps are 4.1% today as against 5.4% six months ago. These are the rates that banks pay for the money, and because their costs are fixed, profit margins are usually smaller than on variable rate loans.
Many lenders have reduced rates on their fixed-rate loans. Lloyds TSB has a two-year fix at 4.49% with a £988 fee, and I expect to see many more fixed rate deals at those rates or lower in the next few weeks.
If you’re remortgaging soon, a tracker, even at 1.5% over base, may well be your best option. But given that base rate is likely to fall again by the New Year, perhaps by another 0.5%, it’s likely that even lower fixed rates will become available. So if your current mortgage deal is maturing in the next few weeks, you could just go onto the lender’s SVR and aim to strike a new fixed rate deal in January or February.
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