Mortgage borrowers find cheaper trackers

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Mortgage borrowers find cheaper trackers

This week's decision by the Bank of England to maintain the base rate at 5.25% after 14 back-to-back rises has left borrowers sighing with relief. It was a close-run thing, with almost half of the monetary policy committee voting for a further increase, and it is not clear if it heralds an end to these or just a pause. Many experts, however, believe rates are now at or near their peak.

If you are about to take on a new mortgage, the outlook for interest rates will be a crucial element in your decision, as well as your capacity to cope if they don't go in the direction the financial world expects.

For several years now, most borrowers have taken out fixed-rate mortgages - they have tended to be cheaper in the short-term than base rate tracker deals and come without any risk that monthly payments will increase. Now, trackers are attracting a bit of attention. Moneyfacts, a financial data firm, said the average two-year tracker rate on Thursday was 6.17% - but there are cheaper deals on the market.

At the broker L&C Mortgages, David Hollingworth points to the home loans from HSBC and Nationwide Building Society, which are priced at the base rate plus 0.14 percentage points. It means they are cheaper than two-year fixed-rate mortgages, and there is scope for monthly payments to go down.

It also comes with no early redemption fees, so you can switch to a fixed rate later if you change your mind. For a few weeks, data from Moneyfacts has showed a large margin between the average rates on these deals. The average fixed rate for a new two-year fixed rate was 6.58%, while the average fixed rate for a five-year fixed rate was 6.07%.

Low rates differ between lenders, and some are much lower than those averages. After the base rate announcement, Nationwide, the UK's biggest building society, has cut its cheapest two-year fixed rate to 5.44% and its equivalent five-year deal to 4.94%.

While in the past, borrowers have been given the option of a lower rate in the short-term or a higher rate in exchange for longer-term security, it's now cheaper to maintain for longer. Brokers say borrowers are tending to go for two-year deals, despite having to pay more each month and facing fees when the time comes to remortgage.

If the UK economy is experiencing a slowdown and the base rate becomes too low, you may not want to commit to paying a rate that is around its current level.

When weighing up the cost of locking in, it is worth considering how far rates will have to move in order to make a two-year mortgage a better bet than a five-year deal.

If you take the two-year deal, you will be subject to a charge of about£100 more each month, and you will have to pay a charge of£999 when you come to remortgage. SPF Private Clients' director, Gareth Lowman, says the five-year deal costs £62,749 in interest and fees over the period. If you start with the two-year deal, you will need to move on to a rate of 4.47%.

'I've noticed a common trend among those whose mortgage payments are really stretching their monthly budget: they are much more likely to opt for fixed rates, and for longer - five years rather than two,' said Alex Morris, a mortgage broker at Clifton Private Finance.

Knowing how much you will pay for five years - even if you think it may be over the odds at times - has a value for some borrowers.

In the summer, Amy applied for a mortgage to buy her first home. She wanted some stability, so she opted for a fixed rate over a tracker, but she did not want a five-year deal.

In her mid-20s now, she says she might be earning more by the time she comes to remortgage, but 'I'm not relying on this, as I've had a couple of years of real-terms cuts'.