Call me crazy... but should you take a tracker mortgage?

Currently, trackers are cheaper than the fixed rates within the same loan-to-value bracket. This is because there is less pricing risk for the lenders, and it is the pricing risk that is causing fixed rates to be withdrawn or have high rates. The critical question of whether a tracker is suitable for a borrower depends on their attitude to risk and how they can handle rate increases. If someone is anxious and unable to sleep peacefully at night, then it is not good for them. On the flip side, if a borrower does have the capacity to handle future rate increases, then there is a good short-term saving to be made. Some lenders, like Nationwide and HSBC, have trackers with no early repayment charges, so they can always fix the mortgage in the future at any time.

Absolute mortgage mania. This week has been reminiscent in parts to the early stages of the credit crunch, where lenders either scrambled to close their doors to new business or to significantly hike their rates. This in turn created a frenzy of activity as clients rushed to bag a 'good' deal anticipating further rate rises. However, by comparison, this time around the marked difference is that it's possible to stabilise markets and limit the damage, if the government chooses to do so. As we approach the end of the week, there is an increasing sense of calm, with lenders and clients alike waiting and watching. Whatever the next few days bring, the aftermath is that there are less rates than there were and the available rates are much more expensive than previously. Trackers rate are looking increasingly competitive and are naturally, therefore, of interest — currently being priced in the region of 1% cheaper than market leading fixed rates. However, you should approach these with a great deal of caution and be able to afford further rate rises. It's very much dependent on individual circumstances if a tracker is right for a client, taking into account all manner of factors, not least affordability.

It's impossible to predict at the moment but there is a plausible scenario that rates could be back at 0.5% in two years. If the BOE raises rates now, we could enter a deep recession next year, house prices could sink, unemployment will rise, and inflation falls away rapidly. Only a month ago, the market was expecting rates to peak much lower and then start to come off. Rate expectations are extremely volatile right now. There is no right answer.

The biggest issue I am seeing with client contacts at the moment is confusion, mixed with anxiety. A form of Chinese whispers and partial information, or misunderstandings from what they have heard, has resulted in lots of people panicking unnecessarily; from people thinking that a mortgage application they have made will be declined due the drop in the pound, to others thinking that the lender is going to withdraw the mortgage offer they have already agreed. Both of these assumptions are completely wrong, but are examples of actual conversations I have had with people this week. Whether to have a fixed rate or a tracker rate is very rarely about the rate itself, or your perception around interest rate movements. As recent developments have shown, one person can make one speech and turn the whole economy on its head, so trying to guess where interest rates will go is always a gamble. As brokers, we speak to our clients about risk and emotion more than trying to be economists. Will they sleep at night knowing their rates could increase the next day? Do they have the financial headroom to cope if rates rise further? Do they have plans that mean they need their mortgage to be more flexible, or can they leave it alone for 2, 3 or 5 years? It's the answers to those type of questions that frame our recommendations to clients on whether a fixed or variable rate deal is most appropriate for their specific situation.