The average two-year tracker mortgage deal has broken through the 2% barrier for the first time on record following the decision of the Bank of England to cut interest rates.
According to the latest figures by Moneyfacts.co.uk, the average two-year tracker rate is now 1.96%, down from 2.02% at the beginning of August.
For buyers with a 40% deposit the average tracker rate is 1.81%, while for those with a 10% deposit the average tracker rate is 2.35%.
The Bank of England cut interest rates from 0.50% to 0.25% at the beginning of the month – the lowest on record. It is the first interest rate cut since 2009, when the financial crisis was at its peak.
The average two-year fixed mortgage has also fallen to 2.47% – down from 2.54% six months ago and 2.68% a year ago.
Buyers currently taking out a two-year tracker deal based on the average rate of 1.96% would find themselves £604 a year better off compared to the average two-year fixed mortgage, and £3,598 better off than sitting on a standard variable rate of 4.78%.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Slashing the bank base rate has led to an impressive increase in activity among lenders looking to offer new tracker deals to prospective borrowers.
“Those 1.5 million borrowers sitting on a tracker mortgage may assume that their repayments will now fall, however this will entirely depend on whether their deal will apply the full 0.25% cut – some deals, such as those with Shawbrook Bank have a collar of 0.50%.
“Tracker mortgages can be more appealing to borrowers looking for flexibility with their loan, with most lifetime trackers without an early redemption charge. These trackers charge reasonable rates of interest compared to standard variable rate deals, which on average charge 4.78%.
“It needs to be said that there is a probable path for the base rate to fall further still, as the market braces itself for many months of uncertainty. Therefore, switching to a tracker mortgage could reap many rewards as customers see their repayments fall. However, borrowers must always check the full details on their offer and, if they are unsure on what type of deal to pick, seek out independent financial advice.”
According to data from the Council of Mortgage Lenders, the cut in the Bank Rate could save someone £26 a month with a 25-year mortgage on a home worth £200,000.
The extent to which borrowers see an interest rate change will largely depend on the type of mortgage they have and whether it is tied to the base rate.
Fixed mortgages account for around half of the UK’s borrowers, while the other half are on variable rates.
Some variable rates track the base rate, while others do not. For those that do not, any changes will be up to the individual lender as the Bank Rate is one of a number of factors taken into consideration when determining the mortgage lending rate.
There are around 1.5 million borrowers with tracker mortgages, which automatically follow changes in the base rate. They are likely to be the biggest winners as they will see their monthly payments drop as lenders are obliged to pass on savings to customers.
Those already on a fixed interest rate will not see any change, but borrowers looking to take out a fixed mortgage could benefit from even cheaper deals as competition between lenders heats up.
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