Why are tracker mortgage rates so high?

MarkOK

I am about to renew my mortgage and I noticed that mortgage rates for tracker mortgages were significantly higher than mortgage rated for fixed rate mortgages. This seams to be a reverse of conventional wisdom. Tracker rates were traditionally lower than fixed rates as they transferred  risk of interest rate changes form the bank to the borrower. 

Does anyone know what the current factors are that have reversed this trend?

MorningcoffeeIV

The current high interest rates, I would imagine. It gives the bank a cushion before the rates start to fall too much. 

Hoenir

Many lenders were caught out when BOE base rate fell to exceptionally low levels. Resulting them in lending at a loss. As a consequence tracker margins have been restored to levels similar to an era in the distant past. 

ACG

The expectation is rates will drop in the coming year or 2 so by having you tied into a fixed rate for a period they are probably working on the assumption they will earn less in the early part of the fix and more in the latter parts. Where as a tracker, the buffer will be the same throughout. 

ElwoodBlues

Because fixed rate offers are based on the lenders predictions of what interest rates will do over the course of the fix. Whereas a tracker is only based on current rates.

Hoenir

ElwoodBlues said:

Because fixed rate offers are based on the lenders predictions of what interest rates will do over the course of the fix. Whereas a tracker is only based on current rates.

Normally lenders will fix the rate at which they borrow to fund each fixed term mortgage product. Thereby locking in their gross profit margin. Hence also why ERC's are levied for borrowers to exit. Too risky to have billons of pounds of borrowings subject to fluctuating interest rates. 

fergie_

The cynical answer would be that they want people to lock-in to longer fixes and would prefer to make good short-term money from people who believe rates will drop shortly.

Hoenir

fergie_ said:

The cynical answer would be that they want people to lock-in to longer fixes and would prefer to make good short-term money from people who believe rates will drop shortly.

The business answer would be that the upfront costs of granting a mortgage need to be recouped. They'll make no money initially. Before fixes came along. Standard Variable Rate was 2% above Bank of England Base Rate.  The only option was to ride the rollercoaster. Budgeting in a changing rate environment was far from easy.