Could a tracker deal save you from mortgage mayhem?

Tracker mortgages have surged in popularity amid the rise in fixed rates triggered by rising oil prices thanks to the conflict in the Middle East.

The mortgage broker L&C said that 10 per cent of mortgage applications this month were for trackers, the highest proportion since October 2023 and up from about 6 per cent in February, when the US and Israel first launched strikes against Iran.

In March, as the war started to affect mortgage rates, homeowners rushed to snap up the last remaining cheap fixed deals and the proportion of tracker applications fell. But now many seem to be signing up for trackers as they bide their time in the hope that fixed rates will eventually start to fall again.

The lowest two-year fixed rate for someone remortgaging today is 4.79 per cent from NatWest, available at up to 60 per cent loan-to-value (LTV) with a fee of £1,495.

The lowest tracker rate is set at 0.21 percentage points above the Bank of England base rate (now 3.75 per cent). It’s two-year deal with Halifax, available at up to 60 per cent loan-to-value with a £1,499 fee. Barclays has a two-year tracker at 0.26 percentage points above Bank rate with a £999 fee, available at up to 60 per cent LTV.

Someone with a 25-year £200,000 mortgage would repay £1,145 a month on the 4.79 per cent fixed deal with NatWest but £1,051 a month on the Halifax tracker. The Bank rate would need to rise to more than 4.5 per cent before repayments on the tracker were higher than on the fixed deal.

Aaron Strutt from the mortgage broker Trinity Financial said: “Tracker rates are suddenly much more popular than they have been for years simply because fixed rates are so much more expensive. Fixed rates had consistently undercut the trackers but since the war in Iran kicked off, they have risen, giving borrowers the option of locking into a much higher fixed deal or taking the gamble of a tracker.”

Strutt said most borrowers had not considered a tracker until recently, but many more of his clients now wanted them.

So is a tracker worth the gamble?

Tracker mortgages are most commonly used by borrowers who are planning to move within a few years because they often come with no early repayment charges. But they can also be popular among those who are willing to gamble that fixed rates will fall.

The average two-year fixed rate has gone from 4.83 per cent to 5.89 per cent since the US and Israel launched strikes against Iran in February, according to the data firm Moneyfacts. The average five-year fixed rate is up from 4.95 per cent to 5.77 per cent.

Fixed mortgage rates have surged because of fears that the war could cause prolonged disruption to the supply of oil and gas through the Strait of Hormuz, increasing prices and leading to higher inflation. This would force the Bank of England either to keep base rate at 3.75 per cent or increase it. Before the conflict there had been forecasts of multiple cuts to Bank rate this year, but those hopes have faded.

David Hollingworth from L&C said: “The widening margin between tracker and fixed rates is leading those who feel this may be more of a temporary issue to consider if a tracker could offer at least a bit of thinking time, or perhaps turn out to be the cheaper option in the longer run.”

The high street banks Santander and TSB said they would cut some fixed rates by up to 0.45 percentage points this week, after clearing a backlog of customer applications caused by last month’s rush to lock in fixed rates.

Economists at the consultancies Oxford Economics and EY Item Club, think that fears of consistent interest-rate rises are overblown and that the Bank will hold rates for the next year. The Bank’s monetary policy committee’s next rate meeting is on April 30.

Andrew Goodwin from Oxford Economics said: “While a rise is possible, we think the fragile economic backdrop suggest a prolonged hold is more probable than a pre-emptive rise.”

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Who should take out a tracker?

The property firm Connells Group said that trackers tended to be most popular with buy-to-let landlords or homeowners with plenty of equity in their properties — 61 per cent of tracker applications last month were for mortgages at an LTV of less than 60 per cent.

Some 6 per cent of all remortgages this year were trackers as were 5 per cent of remortgages for landlords. But they made up only 0.5 per cent of first-time buyer loans. David Fell from Connells Group said: “So it is a bit of a gamble, but not one that could cost someone their home.”

The margin above Bank rate that lenders charge on trackers for borrowers with less equity can make them less attractive. The lowest two-year tracker rate at 90 per cent LTV is from Nationwide Building Society, at 0.94 percentage points above Bank rate. The loan comes with a £999 fee. The same lender is offering a two-year fixed rate of 5.26 per cent with the same fee. The tracker would be £67 a month cheaper for someone with a 25-year £200,000 repayment mortgage.

Anyone considering a variable-rate deal will need to work out how much they can afford to gamble, and whether they can afford to be wrong if interest rates rise.

Strutt said: “Choose a fixed rate if you need budget certainty or believe that the Bank of England may be forced to put up rates significantly. But take a tracker if you want lower initial monthly payments and have the financial buffer to handle potential rate increases, or if you value the flexibility to switch to a fix when you like without heavy early repayment charges.”

If you want a tracker, with a view to fixing later if rates fall, consider the impact of any fees you will pay — on the tracker and also the deal you move to. You can add them to your mortgage, but this will increase the interest you pay in the long run.