The upcoming UK tracker time-bomb

mystic_trev

Tracker loans at the peak accounted for almost 40% of all mortgage loans made. These have provided a huge lifeline for many homeowners who were finding it difficult (perhaps through losing their job or having to take a pay cut) to keep up with repayments on hefty mortgages when rates were much higher. In many cases the savings have been dramatic. It was not untypical for the rate on a £300,000 loan to drop from 5% to 1%, taking monthly payments of over £1200 to as low as £250.

And herein lies the rub. Most tracker deals, like option ARMs in the US, have a reasonably short term on the tracker rate before moving to the bank’s often penal SVR (Standard Variable Rate). We have estimated a reset schedule for tracker mortgages using 2.5 years as the average life of the loan before it shifts to the SVR. Trackers are now a lot less popular, mainly because banks offer fewer of them, and at much wider spreads over the base rate.

Referring to the chart above, we are about to hit another peak in tracker resets in Q3, Q4 2010. As borrowers come off trackers they will reset to the SVR rate, or they may choose to enter into a fixed rate deal or a new tracker (at a much less attractive rate). Either way the result is the same: a significantly higher rate, and significantly higher monthly repayments. Many borrowers who were able to coast through the recession thus far will start to struggle.

http://ftalphaville.ft.com/blog/2009/11/24/85036/the-upcoming-uk-tracker-time-bomb/

the_ash_and_the_oak

whats the ave length of a tracker (just realized I have no idea)

nollag2006

One of the reasons that remortgage rates are so low, is that many existing fixed and tracker rates are no better than the lender's SVR.

For my primary home, I am on BM product which was BOE base rate -0.5%, until late 2008, which then moved to base rate + 2% for the remaining term of the loan. There are probably better rates available, if I wanted to move, but I'm happy just ticking along paying 2.5% for the next year or so.

Once fixed rates come down a bit, I might fix, but there's no rush.

If you have budgeted for the end of your discount rate, and have the foresight to plan ahead, then this sort of thing is not an issue for most mortgagees.

the_ash_and_the_oak

Do you think tracker margins will start to come down around the same time as fixed rates?

treliac

Referring to the chart above, we are about to hit another peak in tracker resets in Q3, Q4 2010. As borrowers come off trackers they will reset to the SVR rate, or they may choose to enter into a fixed rate deal or a new tracker (at a much less attractive rate). Either way the result is the same: a significantly higher rate, and significantly higher monthly repayments. Many borrowers who were able to coast through the recession thus far will start to struggle.

Most fortunate for the present government, this won't hit the fan until after the election!

Apart from the fact that I couldn't bear the thought of this lot let loose on the country for another term, I'd almost like them to win, just to see how they try to spin themselves out of the massive mess they've managed to make of the past 12 years.

nollag2006

the_ash_and_the_oak wrote: »

Do you think tracker margins will start to come down around the same time as fixed rates?

From a thread on here yesterday, it seems that tracker margins are already coming down but fixed margins are still high

The range of new products coming onto the market will certainly help push margins down, but it will take time. At least it will cushion the blow for anyone coming off an existing tracker, and will also help insulate the market for the interest rate rises that will probably start in late 2010 / early 2011

Really2

It was not untypical for the rate on a £300,000 loan to drop from 5% to 1%, taking monthly payments of over £1200 to as low as £250.

the un typical bit is the loan size.

A lot of trackers are lifetime also you can leave them at any time at no cost. (i went for a tracker because it was the only life time mortgage you could get)

HAMISH_MCTAVISH

treliac wrote: »

Most fortunate for the present government, this won't hit the fan until after the election!
.

The article is pure hyperbole.

The biggest of the many tracker reset peaks, already happened....:rolleyes: With no real impact.

The next peak(s) will happen with a similar lack of impact.

• As trackers reset and people go onto SVR, household disposable income reduces.
• As disposable income reduces, spending reduces commensurately.
• As spending reduces, inflationary pressures are lowered, counteracting the increase in inflationary pressures from the weaker pound.
• As inflation doesn't rise, interest rates stay low, continuing the weak pound which drives exports and a more favourable balance of trade.
• Better exports lead to lower unemployment (note how much lower unemployment is than was forecast).
• Lower unemployment leads to less reposessions, and less destruction of wealth.

So perversely, higher mortgage payments (up to a point) actually reduce inflation, lower interest rates, create a weaker pound, better employment and less reposessions.

It's a brave new world.....
:beer:

Really2

Also the peak is 3rd 1/4 08. Those people were clever (they got trackers at around .5 over base)

They may well have paid off over £24K in the 2 year up to reset (using there figures), did they miss that off the time bomb?

nollag2006

NorthernBank have a great little life time tracker at the moment for FTBs with a 10% deposit at BR = 3.49%:
http://www.northernbank.co.uk/en-gb/Personal/mortgages/Residential-Mortgages/Products/Pages/Base-Rate-Tracker.aspx?tab=0#tabanchor

It's good to see these sort of affordable low deposit mortgages finally coming available to FTBs.

Yup - the City brokers have done well in 2009, which will mean great bonuses in the new year, but we really need the FTBs to continue to stream into the market to ensure this price recovery gains pace

the_ash_and_the_oak

BR+3.49=3.99% but i take your point, under 4% isn't actually all that bad - and its lifetime so no fees for coming off? you could take one of these and then just get onto one of the cheaper fixes in a year or two?