Time to take out a tracker mortgage?

Borrowers are being advised to consider tracker mortgages again, as the cost of fixed rate deals rise.

Last week, First Direct launched the market’s first “capped tracker” — with a rate of 2.48% above Bank, giving a rate of 2.98% at present, and a £1,499 fee. Interest repayments, which start at £946 a month on a £200,000 loan, are guaranteed not to rise above 4.99%, or £1,168 a month, for three years.

The deal is not available through brokers, who said most economists expect Bank rate to remain below 5% until 2012 — defeating the purpose of the deal.

However, that is not to say trackers are not becoming a better option. Ray Boulger, at broker John Charcol, said some borrowers would do well to take out HSBC’s market-leading lifetime tracker, at 2.24% above Bank rate — 2.74% at present. Those with a 40% deposit are eligible and the fee is £799.

The loan has no early repayment penalties, so you can switch to a fix at will. Monthly repayments on a £200,000 repayment loan start at £921.

Borrowers shied away from trackers as the cost of fixed rate deals became cheaper and fears grew that Bank rate would soar as the economy recovered. However, these no longer look as attractive.

Last week, HSBC raised the cost of its three-, five- and seven-year fixed rate deals by up to 0.4 percentage points.

The average fixed rate mortgage hit 6.04% last week — up half a percentage point in the past month — said data firm Moneyfacts. We answer your questions:

Is it too late to fix?

Borrowers still have a small window. Boulger said: “If fixed rate loans rise another half point, there’s no point in fixing for many people.”

The best five-year deal from the Post Office is well below the average, at 4.45%, for borrowers with a 40% deposit. Leeds building society has the best-buy two-year fix at 3.64%. Monthly repayments on a £200,000 loan work out at £1,106 and £1,016 respectively.

What is likely to happen to Bank rate?

Last week, a report by Royal Bank of Scotland economists forecast Bank rate would remain at 0.5% until 2011. “The wider economy still looks fragile, despite some more signs of stabilisation,” it said.

However, a Reuters poll last week showed most economists expect Bank rate to rise to 1% by mid-2010.

Should you remortgage?

Those on super-low trackers and borrowers on a Lloyds or Nationwide standard variable rate of 2.5% are unlikely to be tempted by most of the fixed rates available. However, those on Halifax’s SVR of 3.5% could cut their repayments by switching, for example, to the HSBC tracker, Boulger said.

You would get back the cost of remortgaging in the first year and then be as much as £1,400 better off by the second year, he said.