As more property investors grow concerned over rising interest rates, is now the time to consider a different option? We examine the difference between tracker and variable mortgages, and which could be the better choice for you.
For the last decade, we’ve enjoyed extraordinarily low mortgage interest rates, meaning most property investors have opted for fixed-rate products. However, following a year of significant inflation and seven Bank of England Base Rate increases, mortgage interest rates have risen significantly. These increases were accelerated further by Truss and Kwarteng’s catastrophic mini-budget, which had a significant impact on pricing and, consequently buy to let mortgage affordability calculations.
In the current climate, it’s perhaps no surprise that property investors are stuck on what to do when it comes to their next mortgage. With fixed-term products now coming out at almost double what they were a year ago, it’s understandable that landlords are concerned about covering these extra costs. As such, many will now be considering what other choices they have. Whilst most landlords and property investors opt for cashflow security and choose fixed mortgage products, it may be that, given the current market, choosing a variable or tracker mortgage could be a better option.
Tracker Vs. Variable Mortgages – What’s the difference?
When considering whether a tracker or variable mortgage product is the right option, it’s important to understand how mortgage rate pricing works. Fixed mortgage products are connected to SWAP rates, which are the rate of interest lenders must pay other financial institutions to acquire fixed funding for a specific period of time. Due to a lack of confidence in the money markets and the changing political landscape, SWAP rates have been volatile lately, having been on an upward trajectory since the start of this year, with a spike in wake of the mini budget. This explains both the rise in interest rates and the increase in RTI calculation changes, making many applicants unable to afford new mortgages.
Tracker mortgages track the Bank of England Base Rate and are, therefore, often more popular than discounted rates (which track a lender standard variable rate). The Bank of England is seen as a trusted and reliable institution within the UK, and many investors use it as a reference for how the market is doing. However, it’s worth bearing in mind that the Bank of England monitors the market and adjusts the Base Rate depending on inflation levels and the market’s stability. As we’ve seen in 2022, the Base Rate can change regularly.
On the other hand, variable or discounted rates track lender Standard Variable Rates (SVRs). Lenders can set this pricing as they wish and are under no obligation to increase or decrease their pricing, regardless of market activity. What we’ve seen recently on discounted rates, somewhat surprisingly, is that lenders have not been so quick to increase their SVRs, despite the context of the current UK economy. From our own conversations with lenders, this has been due to ethical reasons surrounding further pricing increases for the most part. However, there is a common misconception that all discounted rates come with no Early Repayment Charges, but this is not always the case. So, it’s important to speak to your broker to ensure that your product is suitable for your long-term investment plans.
What we’re noticing is that more and more of our clients are coming forward open to considering various options. Whilst landlords may have been set on finding a new fixed-rate product a couple of months ago, many are now happy to consider tracker or variable rates. This is not just down to current rate pricing but also where they expect the market to go and the benefits that come with selecting this rate type.
If you’re considering your options and would like advice on your next property investment decisions, please get in touch. Our expert brokers can help you to navigate the current, complicated market and can give you free advice on your next steps. Get in touch by calling us on 0345 345 6788, or by submitting an enquiry here.
9th November 2022