Track to win the mortgage race in 2008
By Chris Gilchrist     13th December 2007

The cut in the Bank of England base rate to 5.5% last week means tracker mortgages now look a better option than fixed rates.

The biggest lenders were quick to pass on the base rate cut to borrowers, with Halifax, Nationwide and Abbey swiftly reducing their Standard Variable Rate (SVR) by 0.25%.

With most economists predicting further cuts in base rate next year (the consensus is for two more quarter-point cuts, taking the rate down to 5%), a mortgage with an interest rate linked to base rate (a base rate tracker) now looks the best choice for cash-strapped borrowers.

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Fixed rates now look less attractive
In October, almost 70% of new mortgage loans were on a fixed rate basis, but with two-year fixed rates and base rate trackers neck-and-neck in terms of the current interest rate, trackers look like working out significantly cheaper.

You can still get a two-year fixed-rate loan for just under 5.5% from Co-op, First Direct and Mortgage brokers L&C. Tracker mortgages are usually priced as ‘base rate plus x%’, but there are plenty of lenders offering introductory periods of up to three years during which the rate is base rate without any mark-up. Co-op and Scottish Widows both have two-year offers at base rate.

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Be wise and think ahead
One factor you should think about is the likely position when the introductory term ends. One of the members of the Bank of England’s Monetary Committee warned last week that lenders were likely to increase their ‘lending margins’ over the next few years.

In the free-for-all credit boom of the last few years, lending margins have shrunk, and if they return to more normal levels (for mortgages) of 1.5% to 2% above base rate, then when you come to re-mortgage, your lender’s SVR may well be higher than it is today even if base rate itself has fallen.

And if you have any doubts about your employment or credit status in a few year’s time - which would make it harder to get a new mortgage and/or more expensive - then you would be wise to go for a longer-term mortgage at a rate that won’t increase.

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Don’t get caught out by higher SVRs
Britannia have a five-year fix at 5.39%, for example, and West Bromwich a 10-year fix at the same rate. National Counties have a tracker with an introductory period of five years at base rate minus 0.1%.

The Financial Services Authority warned last week that many of the 1.4 million people due to refinance their mortgages this year could be tipped over the edge by a likely 60% increase in mortgage repayments from the very low rates they got on two-year fixes in 2006.

Article produced by EveryInvestor.co.uk