Monthly Archives November 2008

The (short term) Death of the Tracker Mortgage!

In the news this morning there was debate over the anticipated Bank of England Base Rate change.

Many were calling for a 0.5% reduction while other specialists suggested something more drastic like a 1% reduction was needed.

There was fear however that a reduction of as much as 1% might scare the markets because if many were calling for 0.5% but the Bank cut them by 1% then what does the MPC (Monetary Policy Committee – responsible for setting the base rate) know that the rest of us don’t…?

So a drastic reduction of 1.5% suggests ‘there may be trouble ahead…’

This shock reduction is having an immediate effect on mortgage lenders and consequently the consumer.

In the last 2 hours since the announcement was made to reduce the base rate by 1.5% a plethora of mortgage lenders have immediately withdrawn their tracker rate mortgage products.

The Mortgage Works (a subsidiary of Nationwide), Alliance & Leicester, Skipton and Woolwich have all withdrawn tracker mortgages with no indication they will be replacing them in the near future.

Woolwich have released the following statement, “Following the unprecedented Base Rate announcement today and the withdrawal of competitors from the tracker market, we are temporarily but immediately withdrawing all of our Tracker and Offset products from sale.”

This is a stark contrast to the state of the mortgage market just 5 months ago when it was the turn of the cheap fixed rate mortgage to be threatened with extinction.

Borrowers now have access to Fixed rate offers as low as 5.35% whereas Tracker mortgage have been slowly creeping up in line with base rate reductions until today.

So is this the end of the Tracker mortgage? Or will lenders be issuing new products in the near future?

In order for Tracker mortgages to be attractive there needs to be stability in the market coupled with the possibility of interest rate reductions.

We are currently experiencing unusual turmoil in the markets and while rates are dropping at the moment there is no certainty they will remain low.

Fixed rates are now available in the region of 5.5% and if a tracker is to be competitive it could be as much as BBR (Bank Base Rate) + 2.5% (3.0% + 2.5% = 5.5%).

This is all very well while rates are coming down but if the BBR went back up to 5% or above, anyone with a BBR +2.5% tracker would see themselves facing escalating costs.