More homeowners are turning to tracker mortgage products in the hope that these may offer better value for money if the Bank of England base rate is close to its peak.
Tracker mortgages go up or down as the Bank of England interest rate does, and so if the rate soon starts to fall, customers with one will see their monthly payments decrease.
The main alternative is a fixed-rate mortgage, where the the monthly cost is locked in for a set period of time – usually two or five years.
But the average tracker is currently is 6.02 per cent, far lower than the average two-year fix at 6.81 per cent.
Simon Gammon, managing partner at Knight Frank Finance mortgage brokers and advisers, said that re-mortgaging activity this month July’s activity “will be driven by a surge in demand for tracker products.”
“Many more borrowers are now opting for trackers, betting that rates will keep easing and they will have the opportunity to fix at more attractive rates in a few months,” he said.
Nicholas Mendes, mortgage technical manager at John Charcol brokers added: “We have seen an uptick in the number of customers looking at trackers. We are starting to see a shift in dynamic, where inflation is starting to ease, people are trying to hedge against where interest rates will go. Borrowers can see the implications of being tied into a fixed rate deal when rates could fall in the next six to twelve months.”
“As a brokerage 9.2 per cent of mortgage applications it has submitted so far this month have been for tracker products, up from 4.2 per cent in June.”
Justin Moy of EHF Mortgages explained that for many customers, choosing whether to take on a tracker or not was based on how much they thought that interest rates would rise.
Rates are currently at 5 per cent and are expected to rise further, likely by 0.25 percentage points, later this week when the Bank of England adjusts them.
Earlier this year, there were predictions that interest rates could peak at well over 6 per cent, though better-than-expected inflation data earlier this month has now scaled back these fears, and suggested the rate could peak lower than this.
“If you think base rate will go up a total of 0.5 per cent then the tracker wins, if you think more than perhaps the fixed works better,” said Mr Moy.
He also added that because some tracker deals have low or no charges for swapping away, some customers may be seeking to switch to a fixed-rate deal if these were to improve.
But he also warned that “playing roulette with a mortgage is not everyone’s cup of tea.”
He said some borrowers were trying to predict what would happen with rates to to pay the lowest price, and possibly risking paying more if they got it wrong, rather than sticking and opting for a fixed deal that they know is within their affordability range.
“The danger with this is that you end up taking a product for reasons purely on price, and not necessarily the best fit for the situation,” he added.
Tracker mortgage deals have been traditionally far less popular than fixed-rate deals in previous years, and currently only make up about 8 per cent of the residential and 14 per cent of the buy to let mortgage market.
In recent months though, fixed rate deals have shot up, leaving many unprepared to lock in to paying the higher rates for years to come.