Tracker mortgages mainstream again? Not likely

 Lucy Barrett - Managing Director, Aria Finance

The mortgage market tends to go in cycles; if you stick around long enough, you'll see the same trends reappear and then disappear again from time to time. 

One of the most recent has been the supposed re-emergence of the tracker, which at one point could quite rightly claim to be the UK's mortgage of choice.

Younger brokers may find it difficult to get their heads around just how popular the humble tracker was. 

Roll back the clock to 2009 and they accounted for nearly seven in 10 new mortgages, according to the FCA.

However, for most of the 2010s swap rates were very low by historical standards, boosting the attractiveness of fixed rate mortgages, which came to dominate. 

Today fixed rates are so dominant, in fact, that they accounted for more than nine in 10 new mortgages at the end of last year. 

So, why the sudden media interest in trackers? And does it mean they are once again set to become a mainstream mortgage option for the masses?

To answer the first part of that question, we are hearing more about this once-popular mortgage option because of our obsession with predicting 'peak' base rate. 

Borrowers are being bombarded with headlines on a daily basis about how to peak base rate is in sight - and how rates may actually fall in the coming months. 

For example, just last month Barclays predicted that base rate would peak at 4.5% and would fall by to around 3.5% by the end of 2024.

When borrowers read this, it's natural they will ask whether it is worth taking a gamble on a tracker now in the hope of lower monthly repayments in the future. 

However, I find these days most people soon back away from the idea of a tracker when you outline the pros and cons. 

Firstly, trackers no longer have much of a price advantage over fixed rates, which severely dents their appeal among borrowers.

Data from Moneyfacts shows the average 2-year tracker is currently 4.84% - just 0.48% lower than the average 2-year fixed.

Keen pricing

If the BoE does increase rates one or perhaps two more times, that minuscule rate advantage is gone. 

Clearly, that can change quickly if lenders decide to price their tracker ranges more keenly, but at the moment that's not the case.

Let's not forget, also, that the BoE may take us all by surprise and increase rates much higher than expected. 

After all, it is adamant it will keep increasing rates until inflation falls consistently. 

This is a key point. For all of the headlines we read about 'peak' interest rates, the reality is none of us really know what will happen to the cost of borrowing.

All it takes is worse-than-expected. Conversely, if inflation plummets, rates may by much lower in the medium-term. We just don't know.  

The reality is, the vast majority of borrowers prize security above anything else, even if it means locking in at a slightly higher rate today. 

Recent data from LMS, the conveyance, confirms this. It revealed that 54% of its clean who remortgaged in February opted for a 5-year fixed rate. 

Of those, nearly two-thirds said they did so because they wanted security over their monthly repayments. Fixed rates have ruled the roost for so long that, that mindset is baked into borrowers these days.

It's worth noting also that when trackers were at their peak, in 2009, the regulatory landscape was very different to what it is today. This was pre-Mortgage Market Review and an era when non-advised sales were still permitted. Back then. borrowers could walk into a branch and walk away with a tracker mortgage having gone through nothing more than a decision tree with a salesperson. 

These days most borrowers must take advice. And most advisers would quite rightly point out that trackers are not suited as a mass-market product for the reasons I've outlined above. Therefore, it is no coincidence that trackers went out of fashion the same time that brokers came to dominate the marketplace.

I was to stress, though, that while I don't think trackers will come to emulate their glory days, they do have a place in the market. 

If the outlook for interest rates become more popular among certain types of borrowers, such as high-net-worth individuals who can afford to take the risk. 

But like most trends, I think the current fixation with trackers in the press and among borrowers will be fleeting and normal order will soon return.

Published in The Intermediary April 2023