Trying to second-guess movements in the Bank of England base rate is never easy, particularly in periods of economic volatility. But as more and more borrowers come off low fixed rates, many will choose to compromise the security they have been enjoying for the benefit of lower repayments with trackers because such deals are now much cheaper.
Consumers are being encouraged to take out tracker deals because of prevailing price differentials. Best buy trackers are around 0.3% cheaper than equivalent fixed rates so there would need to be two base rate hikes for the best of the latter to compete.
With higher living costs becoming more of an issue, not too many consumers are likely to resist the allure of lower outgoings.
It is also true that fixed rates are not as good value as they once were. For example, two-year fixes are now back to pre-credit crunch levels but before the crunch the base rate was at 5.75%, so the differential is now significantly higher.
While there is still an argument that consumers on tight budgets should fix, there is proof that its appeal is already on the wane. Council of Mortgage Lenders figures show a 12% decline in the number of borrowers fixing since this time last year and brokers are leading the change.
“Trackers have to be the smart option at the moment,” says Melanie Bien, director at Savills Private Finance. “Not only are they cheaper than fixed rates on the whole but the base rate is expected to fall towards the end of this year and the beginning of next.”
Drew Wotherspoon, head of communications at John Charcol, agrees.
“With news from the Bank of England on inflation revealing marked increases and an expectation of more to come, it now looks likely that the base rate will fall sharply in 2009,” he says.
“Borrowers who do not require the security of fixed rate mortgages would be crackers not to take out trackers at the moment.”
But while economists seem to agree that there is not much chance of the Monetary Policy Committee increasing the base rate any time soon, the consensus is that the chance of it falling sharply is remote, because the BoE has already factored in flat economic growth when choosing to keep the rate on hold. Last month’s MPC minutes showed a three-way split, with the majority voting to keep rates at 5%.
Nevertheless, the theory goes that we are in for a slow and steady decline in the base rate. So the argument for taking out trackers is still compelling but they won’t lead to the massive repayment reductions that some borrowers expect.
This is important, as clients could still be in danger of overstretching themselves to take out the cheapest possible tracker in the hope that affordability will improve as rates fall. If they don’t they could find themselves struggling for longer than they had hoped.
And of course, as Bien says, the most important caveat for clients will always be to only take out trackers if they can afford to be wrong.