To track or to fix? The Big Broker Debate

While SWAP rates have been reducing in the past few weeks, and we are starting to see this filter through to the fixed rate products in the market, we are very much of the opinion that the best value is within trackers right now. Lenders are slowly starting to build an appetite for new business, and this should drive down the cost of borrowing in terms of fixed availability in the not-too-distant future. But for those that need to move now or are coming off their fixed rates in the near future, we are arguably seeing better value in trackers as the price differential is so high between the two. We do expect fixed rates to drop further, especially as we go into 2023, but the added bonus of tracker products is that the majority of them carry no penalty for early redemption, meaning borrows can enjoy the lower tracker margins now and then look to exploit the lower fixed costs that are expected in the future. This is a riskier approach and involves potentially two arrangement fees, but as we are saying to clients, the margin of difference is too high to ignore and, in our opinion, fixed cost borrowing still has a bit of downward movement in it, which we expect to see early part of 2023.

Although lenders are slowly starting to reduce their fixed rates, they are still some way above the tracker rates available, which is making tracker products attractive to a number of borrowers. But borrowers need to consider their own circumstances, financial situations and appetite for risk. While a tracker offers a lower rate at the moment, this could soon change depending on how much and how quickly the Bank of England base rate increases. If the base rate does peak and then starts to fall, a tracker will allow clients to take advantage of falling rates quicker than if they are stuck on a fixed rate. We would always recommend a client receives advice from a good whole of market mortgage broker.

In the current market, it is certainly worth considering a tracker rate as this could well be advantageous, but it very much depends on the borrower's financial situation and appetite for risk. Currently, fixed rates could be sat as much as 1.68% above a tracker using Skipton Building Society as an example. Even with a likely further increase to the base rate in December, this is still likely to be a lower payable rate of interest than the fixed rate. However, it is quite possible that we could see further reductions to fixed rates over the coming months despite more base rate increases. This is due to the margin initially set and also growing competition between lenders. When looking at variable versus fixed as an option, it's important to consider the risk of property price reductions. If a borrower's LTV is high and they have little cash available to inject to reduce the resulting loan to value, then this could put them in quite a precarious position. It is always best to speak with an independent adviser so that they can run through hypothetical scenarios for you when considering possible market changes. Of course, none of us have a crystal ball that tells us what the future holds for the market but we can certainly assess the possible options and therefore plan accordingly. At the end of the day it is down to risk appetite for the individual but in my opinion the prospect of a tracker in this market is certainly something that should be considered.

We’re seeing lots of people enquiring about tracker rates at present and they are particularly useful for clients that have some room within their budget for changes. Many people are interested in the fact that these rates have low or no early repayment charges, so in the future if they are worried about the amount they are increasing by, they can switch to a fixed rate at that point. Tracker rates are not for everyone and if a client is risk adverse and wants some certainty, these are not for them.

I have seen an increase in enquiries from clients regarding tracker products recently due to the recent increases in fixed rates. However, so far I have seen very low numbers actually opting for them over a fix due to uncertainty and the preference to know exactly what they are going to be paying over the next 2 to 5 years. Trackers can provide savings at the moment and are worth considering, however given the base rate is forecast to increase once again, the general response I am seeing from clients is they would rather have the security of a fixed payment due to the rising cost of living and the sharp base rate rises we have just been through than risk their mortgage payments increasing along with their bills and food.

Trackers are a gamble, no doubt. But right now they are often much cheaper than the equivalent fix and are worth considering for those who can afford to take the risk. On many trackers, there are no early repayment charges either. So if the Bank of England base rate starts going higher than expected, or looks likely to, you can switch on to a fix. If you want peace of mind, fixes are still the way to go.

Proper mortgage advice needs to be specific to each client and therefore there's no one rule for all regarding fixed versus variable rates. Variable and tracker rates are certainly becoming a more popular option in this current market and clients are giving these more serious consideration alongside fixed rates, which have typically been the go-to. A good broker should help model some numbers to get a feel for what potential rises would be mean for a client opting for a variable rate. If a client is open to an element of risk and can get comfortable that their mortgage payment can move during the product term, then variables are to be explored.

Trackers are a great tool in a broker's arsenal but they aren't without their risks. They move with the Bank of England base rate, although they do have a degree of wiggle room right now. On a shorter deal, you could be in for a saving, but trackers shouldn't be approached without proper advice.

Trackers are certainly looking extremely appealing at the moment for the right people. In recent weeks, following economists saying the Bank of England may not need to increase rates as quickly or as high as previously forecasted, this has certainly added to their appeal. We can't take a one-size-fits-all approach with clients, though, and they need to be fully aware of the risk that rates can increase further in the months to come and by the time the mortgage completes the original payment they had been quoted could no longer be their actual payment. If customers are considering a tracker option they need to take a robust look at their income and expenditure and work out at what rate their mortgage would become unaffordable. If there isn't much wiggle room, this may not be the answer. However, if there is, it gives people an opportunity to ride out the highs and lows of the economic storm as it unfolds.

I would seriously consider a tracker as the fixed rates are significantly higher. Even if the base rate increases as expected, it would take a substantial rise for the tracker to be higher than the fixed.

Tracker deals are proving popular in the current climate, but it has to fit your circumstances. The rate will move in line with the Bank of England base rate so any increases will negatively impact your mortgage payments, and decreases will lower your monthly repayments. The real benefit of trackers mortgages are that many carry no Early Repayment Charge, so if rates increase you can switch to a fixed term deal to protect your pocket.

This is a question I am being asked a lot of late by clients compared to previous months. Personally, I wouldn’t advise tracker rates to our clients, especially at high LTVs both for buy-to-let and residential mortgages. They're very unpredictable and in the case of buy to lets, the stress tests that the lender does to make sure the rent costs cover the mortgage are much higher on a variable product so might not fit on this basis. Also, some lenders have actually dropped their fixed rates recently after the huge increases we saw a couple of months ago, and so a fixed rate is more inviting given there are likely to be additional rate increases in the upcoming months or years. Also with a variable rate, when you then decide to switch onto a fixed rate there will be an additional broker fee, valuation fee, lender arrangement fee, solicitor fee and it can take three months to go through. As well as this, it can be harder to budget as you won’t know what your monthly payments are as these will change as the base rate changes, which they could be doing again in December. Although you may be able to afford the tracker payments today, this might not be the case once rates have risen, and you don’t have the stability that you would have with a fixed rate.

Tracker and discounted mortgages are risk / reward type products - the issue has been that there has been little reward for the risk of taking them in recent years with the pricing so similar to that of fixed rate deals. More and more clients are looking at these products now as viable options - and with the advice of a good broker you can weigh and even price potential future increases into your thinking before committing to them. Products such as Barclays no ERC tracker which allows the client to switch to a fixed rate without penalty are fantastic options for a lot of clients remortgaging at the moment.