There was a time – not too long ago, in fact – when the humble tracker mortgage reigned supreme.
In 2009, around seven in ten new mortgages were sold at variable rates, according to data from the Bank of England.
However, their popularity has since plummeted, with less than one in 10 borrowers opting for one since 2019.
The reason for this is quite simple: fixed rates have been so low in recent years that it has been difficult to make the case for a floating rate product.
This trend could be here to stay, especially since the Bank of England has just raised rates to a 13-year high of 1.75%. I imagine most borrowers would see this and instinctively decide that the best option would be to fix their monthly repayments.
You can’t blame them for that and the reality is that, for most people, follow-on mortgages won’t be suitable right now.
But there will be borrowers for whom a follow-on mortgage is the ideal option – and it all has to do with the expected path of interest rates.
Fixed rates on the rise
There’s no denying that fixed rate mortgage rates have increased significantly over the past year.
Data from Moneyfacts shows that the five-year average residential fixed rate just topped 4% for the first time since October 2014, up 1.44 percentage points since December.
In the buy-to-let space, our research shows that the average homeowner will pay 4.57% if they fix their repayments today, significantly more than a year ago.
This means that anyone who chooses to fix now will pay a lot more than before, unless they’re lucky enough to have built up some decent equity in their home.
And, unfortunately, fixed rate mortgages are only likely to get more expensive in the short term.
Markets are betting on a peak discount rate of 3% in 2023, which will inevitably lead to higher swap rates and therefore more expensive fixed rate mortgages.
Bid on follow-up offers
So borrowers coming to the end of their current contract have a choice: Are they locked in for, say, another five years at a higher interest rate, or do they try a follow-on mortgage?
It may sound counter-intuitive, but there is a logic behind the question.
You see, a look at the overnight pegged swap rate curve suggests the Bank Rate will peak next year before falling back to 2.2% by Q3 2025. .
If this actually happens, it’s likely that those who opt for an adjustable rate mortgage now will be better off in the medium term, even if it means higher repayments in the short term.
Of course, there is an obvious flaw in this argument: the direction of the bank rate is fluid, and no one can accurately predict where rates will be three months from now, let alone three years from now.
But for borrowers who are convinced that the Bank of England will have to embark on a series of rate cuts to stimulate the economy once inflation is brought under control, this could be a risk worth taking.
Another major advantage of tracker mortgages is that many of them are free of prepayment charges, which means borrowers can repair at any time if they wish.
However, this is where the advice provided by you, the broker, to your clients will be invaluable.
It will be a long time before the tracker becomes the dominant product type on the market again. But for the good borrower, I would say they are once again worth consideration.