Why are Trackers so high?

getmore4less

The key to any mortgage is to look at the life time of the loan as if you did not change just in case you can't

For most this will be the before and after any penalties to exit over standard exit fees.

This usualy involves a promotional rate(fixed or variable) for a period and a followon rate.

For lifetime tracker there will be one rate and may or may not be penalties for a period, for my offet tracker it was £500(the waived legal and survey fees) for 2 years.

What you are looking at is how competative are these two rates likely to be at the point where you can choose to leave penalty free.

For many the followon will be a SVR or a tracker. so you are looking to see how competative these are, so does the lender have a good record keeping SVR competative or not, is the tracker rate competative against current tracker rates.

You can choose a lender with a high follow on because they have the best rate in the promo period and you are confident you can find another deal or you could take the lender with the best track record for a bit more up front and a better followon in case you can't remortgage.

For current tracker deals you need to compare against the other options.

A current tracker at 3-4% above base is inline with many followon rates so has no benifit in the second phase in the first phase if the fixes/discounts are same or better you are probably better taking one of those.

For trackers that are better than this say around base + 2% then these are much better that the current crop of followon rates so you are now looking at the first phase is this rate likely to stay below any other options.

So looking at first direct as a lender they have a reasonable reputation with SVR

and their options at 65% LTV with £99 fees

base+1.89% lifetime
base+1.49% 2 year followon is SVR 3.69% so base+3.19 (£999 fees for lower rate)
base+1.69% 2year followon is SVR again

So you are trading a reduced rate for 2 years for the potential lower rate for life time.
So the question is will a base+1.89% still be competative as a tracker in 2 years.

MY view is that it will still be a competative rate so the life time is the better deal for many, the tradeoff is savings against another set of fees and the risk you can't remortgage, a borrower with the intention of high overpayments and clearing the mortgage quickly might be benifit from the discount.

Looking at the fixed option against the above, sane £99 fees SVR(3.69) followon
2.99% 2 year
3.89% 5 year

comparing against the discount trackers it is where do interest rates go in the 2 or 5 years
2 years I think will be a tough call probably break even favouring the tracker even for those that think they need to fix.

5 years the first 2 is leaning towards being expensive for years 3-5 against SVR or new deal, against SVR it will win its a tiny bit over and I think rates will rise at least that bit. against new deal I think it will also be a winner.

So if you need(or think you do) to fix the 5y is the way to go the cost of the higher rate in the first 2 years will likely win in the next 3.

Now against the lifetime this is a tougher call will rates get that high, I think they might but not that soon, the overpayments that you can make will mitigate some of this. In 5 years I think a base+1.89% might be bettered as rate rise I think the tracker margins will drop a bit so a switch may be possible.

For someone who is confident they will be a ble to remortgage in 5 years the fix looks like an option to consider if you think rates will go up say by around 2% or more.

Now for higher LTV the picture will be very different.
85% LTV 999 fees SVR(3.69%) followon

base+3.49% lifetime

4.69% 2y fix
5.59% 5y fix

Tracker has no benifit in the followon so it is a simple call on rates.

Unless you can do something about the LTV or lending loosens again then on high LTV the trackers are looking a lot less competative.


Many people ingored the followon and that were many have come unstuck with LTV issues and/or income issues that have restricted their choices going forward.

What this also tells you is that anyone with a current tracker that is below base+1% would be mad to give that up unless there were some extream reasons, upto base+1.5% needs a bit more thought, above that I think we will see these rates return for people with good LTV and income multiples.

EDIT:
Forgot to add that if you have a high LTV and a cheap tracker then the tracker rate needs to be much higher before you should think of switching
Base+2%(nationwide BMR that a lot have) is a great rate for someone with >85% LTV so should thing about keeing it because the rates available at that LTV are much higher now(eg nationwide SMR of base + 3.45%)

pingua

We are lucky to be with the bank of Ireland on 2.99 at the moment. would we be mad to fix for 5 yrs at 3.89 with first direct?

opinions4u

pingua wrote: »

We are lucky to be with the bank of Ireland on 2.99 at the moment. would we be mad to fix for 5 yrs at 3.89 with first direct?

If you think rates will increase by more than 0.9%, and the costs of remortgaging aren't excessive in comparison to the size of the loan, you'd be mad not to consider it.

mongmoney

I have a mortgage of 63,000 at 4.88%, and a further advance of 18,000 at 2.5% with Nationwide.
Should I consolidate these loans and go for the 5 Year fix at 3.89% with First Direct?
The fees will come to about 2500 in total.
Mongy

Thrugelmir

kriss_boy wrote: »

So do you think most people would agree that a tracker 4/5% above the BoE is just asking for trouble?

From the lenders point of view it guarantees their margin.

BOE base rate remains low. Cheap retail deposits.

BOE base rate rises. Mortgage customers will pay exit fees and fees for a new mortgage product to switch to a lower rate.

As once BOE base is at a more normal level. SVR's too will normalise in the 2% to 2.75% range above base rate.

hshen

opinions4u wrote: »

Abbey were known for putting the big savings rate in the window and then, once you get inside, telling you that you need to match the sum saved with an overprice, poor performing investment plan too - which cross-subsidised the savings account. Additionally, repeating a point I made above, wholesale funding is significantly more expensive (and scarcer) now that it has been in the past.

Put simply, if banks were flogging trackers at BofE plus 0.75% in today's environment they'd go bust.

Good to see someone understands the difference between BoE base rate and money market rate.

The BoE base rate is meaningless unless BoE provides the mortgages to match their rates.

I think Reserve Bank of Australia did that once when the retail banks refuses to pass on the rate cuts a long time back. And make a killing.

Times are different now though. Even BoE will not contemplate something like that. As tax payers will be effectively offsetting people's mortgage rate.

Oh wait, USA did and is still trying to do that. They got no one else to blame.

hshen

Gorgeous_George wrote: »

If I was the lender, I'd offer a tracker at BofE base rate + 1.5% - but with a collar/floor at between 3% and 5% (depending on LTV). I'm sure this would be attractive to many borrowers and would give some protection to the lender whilst also allowing decent rates for savers.

I think the fact that lenders are offering trackers at 4%/5% above base rate indicates that they do not expect base rates to rise significantly over the term of the fix.

GG

To be fair 3% above base, which used to be cost of borrowing from depositors, was the norm before the credit binge of last few years.

Expecting the low rates to continue is not where I would put my money.

This is the time to de-leverage before base rate go back up.

Gorgeous_George

hshen wrote: »

To be fair 3% above base, which used to be cost of borrowing from depositors, was the norm before the credit binge of last few years.

Expecting the low rates to continue is not where I would put my money.

This is the time to de-leverage before base rate go back up.

In 2004 I took a lifetime base rate tracker with a 0.74% margin above BofE base rate. I guess that must have been during the credit binge that you refer to.

Whether or not base rates will remain low for the next 1/3/5/10 years is anybody's guess. I'm not sure why you refer to de-leveraging however I do think that we all should have a plan to mitigate any movements in base rates. My plan does not include overpaying a loan with a 1.24% interest rate.

GG

originalmiscellany

mongmoney wrote: »

I have a mortgage of 63,000 at 4.88%, and a further advance of 18,000 at 2.5% with Nationwide.
Should I consolidate these loans and go for the 5 Year fix at 3.89% with First Direct?
The fees will come to about 2500 in total.
Mongy

I would say yes, but I don't have access to a number crunching spreadsheet. Sorry!

You'd get a fixed amount of what to pay, a lower rate on your 63k which I think would be good in terms of stability.

That said, until someone/you get a crunching spreadsheet, it's hard to tell you a definite answer.

Gorgeous_George

mongmoney wrote: »

I have a mortgage of 63,000 at 4.88%, and a further advance of 18,000 at 2.5% with Nationwide.
Should I consolidate these loans and go for the 5 Year fix at 3.89% with First Direct?
The fees will come to about 2500 in total.
Mongy

The quick answer is that I wouldn't switch any borrowing away from Nationwide's 2.5% BMR unless you want the security of a fixed rate.

The longer answer requires more data such as how long you have left on each mortgage, how long the new mortgage would be for and the ERCs of each mortgage.

GG