If just five years or so is left on the term of your mortgage, you might just want to give up the tracker and lock into a five-year fixed for the certainty it gives you.
You can choose a tracker for a set period of years – once it's over, you can either switch to a new tracker or fixed rate, or we'll move your mortgage to our follow-on rate.
Average 30-Year Fixed Rate
After hitting record-low territory in 2020 and 2021, mortgage rates climbed to a 23-year high in 2023. Many experts and industry authorities believe they will follow a downward trajectory into 2024.
Most times, people making a mortgage switch are doing so to take advantage of a lower interest rate elsewhere. However, the penalties are probably more than the interest you'd save on making a switch before your maturity date. If you can, it's better to wait until your mortgage is up for renewal.
Tracker mortgage deals are usually agreed on for a set period. Because of this, if you want to switch to another deal or pay off your mortgage early, you will probably have to pay an early repayment charge (ERC). If fees apply, it's up to you to decide whether you're happy to pay an ERC to change mortgage deals.
If rates are more competitive, this could work out okay; but if ECB rates fall, and bank rates stay the same, it could look like an expensive financial mistake. “If you can withstand the latest increases, it may be of benefit to your future financial self to retain the tracker,” says Hennessy.
However, despite fixed-rate deals getting cheaper, tracker mortgages could still be the right choice for some people. “I would suggest a tracker would still make sense for a lot of people as the Bank Rate is likely to reduce in the next two years. However, some tracker rates are 1pc higher than a two-year fix.
There are many reasons you may want to switch mortgage, but the most popular is to save money. Switching mortgages is known as remortgaging when you do so with another lender. You can also switch mortgage deals and stay with the same lender – this is known as a product transfer.
Reasons to switch include:
Save thousands over the term of your mortgage through lower rates. Knock years off the life of your mortgage. You may qualify to overpay by up to 10% of your mortgage balance each year even when your rate is fixed. No mortgage arrangement fees.
You could save money
You might be offered a better mortgage rate by looking elsewhere. Furthermore, if you use a mortgage broker, then they may be able to find you a much better deal than your current lender can offer directly. There may also be additional offers available such as free legal fees and cashback.
After all, higher rates equate to higher minimum payments. So, you may be wondering if, and when, mortgage rates might fall to 3% or lower again - and whether or not it's worth waiting to buy a home until they do. Although rates could fall to 3% again one day, it's not likely to happen any time soon.
The ESR Group expects mortgage rates to decline in 2024, ending the year below 6 percent. The lower rate environment is expected to boost refinance volumes, which are already on the upswing, as evidenced by the recent uptick in Fannie Mae's Refinance Application-Level Index, to nearly double their 2023 levels in 2024.
The National Association of Realtors expects mortgage rates will average 6.8% in the first quarter of 2024, dropping to 6.6% in the second quarter, according to its latest Quarterly U.S. Economic Forecast. The trade association predicts that rates will continue to fall to 6.1% by the end of the year.
What happens if I want to end a tracker mortgage early? If you're within a set deal period, most lenders charge early repayment charges (ERCs) to leave before the end date. Although this doesn't usually apply to lifetime trackers. How much ERCs you'll be charged depend on how long is left on your deal.
Tracker mortgages are generally cheaper to begin with than fixed rates. This is because fixed rates offer security against a rising base rate, whereas trackers can see monthly repayments rise.
You can make extra mortgage repayments or clear your mortgage earlier than agreed without having to pay any penalties. If you move from a tracker interest rate to an alternative interest rate, such as a fixed interest rate, you cannot go back to onto a tracker interest rate in the future.
Recommendation: If your mortgage has a low margin, of 0.6% points to 0.75%, then it could still be worth holding onto your tracker. However, if your tracker mortgage is at a higher margin, say 1.25 % or above, then giving up your tracker in favour of a fixed rate is worth having a conversation over.
If you can afford to make extra payments, overpaying your mortgage means you pay less interest in the future and pay off your mortgage sooner. This means you could save a lot of money.
It boosts your credit score
Although your credit might take a temporary hit when you get your mortgage, over time, paying down the balance can help improve or maintain your credit score. A higher credit score translates to everything from better interest rates to more loan options.
However, most forecasts anticipate a decline in interest rates from around 5.25% now to 4% by the end of 2026. If this is reflected in future mortgage rates and you opt for a shorter deal now, then you will only be paying the higher rate for two years rather than five.
Many experts predict interest rates will remain at their current level for most of 2024. This may mean that mortgage rates stay at or about the same level as now for many months before possibly starting to fall towards the end of 2024.
If you are currently on a variable rate, you can switch your mortgage at any time. If you are on a fixed-rate rate, you may have to pay a fee for ending the fixed-rate early. If you switch to a different lender, you will have to pay legal fees similar to when you first bought your house.
'The key benefit of a tracker mortgage is the flexibility, and the ability to change to a new product without any early repayment charges. 'This means if fixed rates do fall within the next 24 months, you will be able to move on to a cheaper product sooner than if you were tied into a fixed rate. '
However, when the financial crisis struck banks' funding costs soared and tracker mortgages became a loss-making line for lenders. They stopped offering the product that year, and tried to prevent existing borrowers moving on to tracker loans – typically after a fixed-rate period came to an end.
A tracker mortgage 'tracks' changes to the ECB rate. If the ECB decides to increase or decrease its rate, the rate on the Tracker mortgage will go up or down by the same percentage.