Time to ditch your Tracker Mortgage?

Interest rates have gone up – everybody panic! Only joking, they have gone up today but there is no need to worry….at least not yet anyway. This is newsworthy because today’s increase is the first time the Bank of England base rate has gone up for over a decade. Think about that for a minute, if you were a First Time Buyer in 2007 or later you have never seen a rate rise! Incredible but true.

In 1997 the Blair/Brown Government turned control of interest rates over to the Bank of England with complete Independence. This is their tool to deal with inflation – if inflation is headed up then they raise rates to keep the economy under control. This first-rate rise in all these years further serves to illustrate just how long it has taken for the Economy to recover from the Banking crisis where some well-known High Street institutions were bailed out.

The reason borrowers ought not to be panicking is that this raise to 0.5% only put the rate back up to where it was from 2009 all the way through to August 2016 when a further reduction took place following some gloomy growth forecasts. A rate rise is a rate rise though and its symbolic significance to mortgage-holders is that it appears we have now seen the back of the all-time low fixed rate mortgages and if you fixed your rate recently the chances are that next time your deal comes up for renewal your payments will increase.

The vast majority of borrowers have been taking out fixed-rate mortgages so if you are one of those people then your mortgage payments will remain unaltered by today’s base rate increase. What is fascinating for me though is to see how people with tracker mortgages that they have had for a long time will react. Will they simply shrug it off? Their payments will only increase back to what they were paying a little over a year ago after all. Or will they ditch their beloved base-rate tracker and say thanks for the memories?

Attitude to risk comes in to play of course as does all-around affordability. If a borrower is for example in the last few years of their mortgage term, then they are more likely than not to leave their mortgage where it is. However, a borrower with a larger balance and long-term still to go will be thinking if they leave it much longer will they still be able to hook into a great fixed rate such as the ones still on offer?

There has also been a move away from the short-term 2 year fixed rates towards the longer 5-year deals. Even though these deals have been going up in the past few weeks as Lenders’ anticipated today’s news they are still exceptionally low and represent great value for mortgage holders who like the idea of stabilising their payments for a longer period. The way it works is that the 2 year fixed rates tend to be lower than the 3 years, the 3 years lower than the 5 years and so on.

So, will a £20pm increase to a tracker customer’s mortgage cause a stampede to fix? Maybe not, but for sure if you are sitting on one of those historic low tracker mortgages then today’s news will definitely make you at least have a little think about whether now is the right time for you to hop off it.

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