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Think twice before betting on a cheap tracker mortgage

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Borrowers tempted to take out a cheap tracker mortgage due to rising fixed rates are urged to think twice.

Experts warn that while their refunds will be lower now, it could cost them thousands of pounds more in the long run.

Tracker or floating rate loans used to be very popular, accounting for seven in ten new mortgages in 2009.

Rising interest rates: The average two-year fixed rate has risen to 4.09%, compared to 2.52% in August last year, according to data analysts Moneyfacts

But they fell out of favor after the financial crisis, when interest rates plummeted.

This lowered the cost of fixed-rate loans, which protect borrowers from sudden bill surges.

So for many it seemed like a good idea to stick with a low-cost solution – and only one in 11 outstanding mortgages are now trackers, according to figures from UK Finance.

Still, brokers say that as the cost of fixed deals increases, many borrowers change their minds. Emma Jones, owner of Alder Rose Mortgage Services, says: ‘We’ve seen interest rates rise around 10 percent for mortgages that follow the Bank of England’s base rate. Many are attracted to the initial refunds, which can be significantly lower than current fixes.”

The average two-year fixed rate has risen to 4.09 percent, according to data analyst Moneyfacts, from 2.52 percent in August last year.

A typical two-year tracker is on average 3.33 percent cheaper, compared to 2.35 percent 12 months ago.

When it comes to top rates, the best two-year fixed deal for a borrower with a 40 percent down payment is 3.24 percent with Barclays.

Still, Skipton has a two-year tracker of 0.66 percent plus base rate. This is currently 1.75%, so a total of 2.41 percent. For a typical £150,000 loan, this equates to £64 per month, or £768 per year, cheaper.

But analysts predict that the Bank of England will raise key interest rates by at least 0.25 percentage point next month.

Capital Economics forecasts five hikes in key interest rates between now and May, with experts expecting it to peak at 3 percent before starting to fall in the second half of 2024.

False economy? Brokers say as the cost of fixed deals rises, many borrowers are considering floating rate loans

Based on his predictions, analysis by broker L&C shows that a borrower with a 10 percent down payment would end up paying £688 in additional interest per year if they chose the cheapest two-year tracker on the market instead of the best two-year fix. And if they had a loan of £450,000, they would pay £4,127 more in two years.

The gap is smaller for those with larger deposits. But even a borrower with a 40 percent down payment, borrowing £150,000, would still pay an extra £165 per year if he went for a tracker instead of a solution.

Compare the monthly costs of fixed and tracker mortgages and see the best deals you can apply for with our best mortgage interest calculator.

Other forecasts are even bleaker for those betting on the base rate. And realtors warn that if homeowners change their minds later, repair costs will be even higher as lenders frantically close all their best deals.

This can be disastrous for borrowers who have gone out of their way to take out larger loans.

Dominik Lipnicki, of Your Mortgage Decisions, says: “Most people agree that mortgage rates, like energy prices, will continue to rise. Unless you don’t think that’s the case, being stuck with a base rate tracker can be a very dangerous move.”

But some experts believe that lenders deliberately set flat rates high and prices may fall again.

Jane King, Mortgage Adviser at Ash-Ridge Private Finance, says: “Lenders may bring in some of their cheapest solutions within days because they can’t keep up with demand. For those who can handle the risk of rising repayments, betting on a basic interest tracker can still be attractive.’

She adds that one of her customers switched to a tracker deal last week and their monthly refunds are £90 less than what they would have paid with a fix.

“As with any type of mortgage, it all depends on personal risk,” says Ms. King.

Banks and mortgage brokers are inundated with mortgage applications and the average deal is now on the market for just 17 days, according to Moneyfacts.

Best Mortgage Rates and How to Find Them

Mortgage rates have risen significantly as the Bank of England base rate has risen rapidly.

If you’re looking to buy your first home, move, or get a new mortgage, or are a buy-to-let landlord, it’s important to get good independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money partners with independent, free broker L&C.

U.S mortgage calculation powered by L&C, you can filter deals to see which ones match your home’s value and deposit level.

You can also compare different mortgage interest terms, from two years fixed to five years and ten years fixed, with monthly and total costs shown.

Use the tool on the link below to compare the best deals, taking into account both fees and rates. You can also start an application online on your own time and save it as you go.

> Compare the best mortgage deals now

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