Worried about the repayments? Stay on track with a tracker

Worried about the repayments? Stay on track with a tracker

Coming off a fixed rate mortgage and wondering how you will cope with the payment shock? The answer may be to forget fixed rates and opt for a lifetime tracker deal, which are currently offering about the best value in the mortgage market.

The average two-year fixed rate, even after this week's cut in Bank of England base rate to 5%, is now 6.2%, and often there are fees of £500-£1500 to pay. But it's not all doom and gloom. Borrowers, even those with just a 10% deposit, can remortgage to "lifetime tracker" deals with a starting rate as low as 5.5%-5.75%, avoid application fees entirely - and the rate you pay is directly linked to the Bank of England's base rate.

Some economists, such as Roger Bootle of Capital Economics, expect the Bank to cut interest rates as low as 3.5% by 2009 as it struggles with the credit crunch.

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In that scenario, the canniest lifetime tracker mortgage holders could be paying as little as 4% for their home loan. Even the non-pessimists see a further one or two base rate cuts this year, suggesting a pay rate of around 5% for tracker holders.

One of the major plus points for lifetime trackers is that you are not tied into any particular period - you can up sticks at any point and switch to another deal - which borrowers will want to do once base rate starts marching back up.

So what are the best lifetime tracker mortgages available?

Fee-free deals HSBC and Barclays are both offering a Bank of England base rate (BBR) plus 0.74% deal with no fees and no early repayment charges. After this week's rate cut, that means the starting rate will be 5.74%.

The HSBC deal has the edge, as its rate is available for customers with a deposit as low as 10%, while Barclays wants a deposit of 40% to qualify for its best deal. If you have savings as well as a mortgage, then Egg's BBR plus 0.75% deal will be better value.

It is an offset mortgage, meaning that you can use your savings to reduce the mortgage balance, but still have access to them at any time.

Fee deals If you have a large mortgage, it can make sense to take one of the fee-charging trackers. HSBC again leads the field, with a BBR plus 0.38% deal, giving you a start rate of just 5.38%. The fee is £599, but it is available for a property loan-to-value of up to 90%.

Halifax has a BBR plus 0.4% lifetime tracker, giving a starting pay rate of 5.4%. The fee is £999 and it's open to anyone who can put down a 25% deposit. But if you have only a small deposit, then Halifax's tracker deals become very unattractive.

On a 5% deposit, the best it will offer is BBR plus 1.49%, giving a start rate of 6.49%, and then there's the fee to pay as well.

Nationwide's lifetime trackers are also particularly poor value at the moment, at BBR plus 1.44% for all customers, although there's no fee to pay.

Co-operative Bank has a relatively attractive BBR plus 0.64% with a £699 fee plus an exit fee of £140.

Will I be able to get these deals?

There is no guarantee that any of these deals will remain in place for long.

According to David Hollingworth of London & Country Mortgages, the best tracker deals a few months ago were on offer from Woolwich (part of Barclays) and C&G, but they have since edged up their rates.

"At the back end of last year, the best trackers were BBR plus 0.2% for life. They were extremely popular, and have now been withdrawn. C&G has also added an early repayment charge."

Nationwide has been increasing its tracker rates substantially, and the expectation must now be that Barclays, Egg and HSBC will follow.

The good news is, you can reserve deals in advance. For example, Egg allows homebuyers to reserve up to three months in advance.

What if base rate falls dramatically? Do they guarantee to match it?

Yes and no. Most lifetime trackers include a clause which puts a floor on the rate. For example, Nationwide says its tracker rates will never fall below 2.75%, even if Bank of England base rate falls to zero.

But Abbey (whose tracker is BBR plus 0.94%) promises to match base rate all the way down to 0.1%

Halifax's tracker includes a clause that it can, in extreme circumstances, pull out of the deal.

But it promises to give mortgage holders an extended notice period if it wants to alter the deal, and allow for a fee-free switch.

p.collinson@guardian.co.uk

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