Payment shock for low-rate tracker borrowers

More than 100,000 borrowers with tracker mortgages, who have been enjoying near-zero interest costs since the base rate hit 0.5 per cent in the spring, are facing increases of hundreds of pounds in their monthly repayments.

Deals ending this autumn that had undercut the base rate are, in some cases, set to increase by more than 4 percentage points, adding £500 to the monthly cost of a £140,000 mortgage for an interest-only borrower, according to John Charcol, the broker.

Some of these ultra-low trackers, typically two-year offers that were available in the early days of the credit crisis, have charged interest of just 0.1 per cent or less in recent months. By contrast, new tracker mortgages are around 3 per cent.

With some homeowners set to see a 100-fold increase in their monthly mortgage payments, Richard Morea, technical manager at London and Country, the broker, said: “This is absolutely a ‘payment shock’.”

The standard variable rates (SVR) that borrowers typically move on to may still look reasonably low at 3 or 4 per cent, “but the difference in monthly payments may come as a significant shock”, he said.

Thousands of tracker borrowers with Halifax and C&G, who have been charged a nominal rate of just 0.01 per cent since the spring, are the latest to see their payments leap as their cut-price deals came to an end this week. Borrowers who have been on Halifax mortgages charging base rate minus 0.51 percentage points will now pay the lender’s 3.5 per cent SVR. C&G borrowers who have been on 1.01 percentage points under base rate will now pay 2.5 per cent.

Ray Boulger, senior technical manager at John Charcol, said the rise in payments should not be a problem for borrowers who “have been sensible and have saved”, rather than spending the extra cash they have had since the base rate dropped.

It could now make sense for borrowers to use any savings to pay down their loan to reduce future interest costs, while some will have already used the previous interest reductions to make overpayments.

Morea said that as the “go to” rates on these mortgages were still generally lower than those when borrowers took out their tracker deals two years ago, the increases “should still be affordable” for many homeowners.

In some cases, borrowers are moving on to lifetime tracker rates under 2 per cent. For example, those with Woolwich’s “City mortgage”, which had a minimum loan size of £500,000, will switch from a two-year tracker rate of 0.34 per cent, to a lifetime tracker rate of 1.49 per cent.

Boulger added that borrowers on repayment mortgages would also see less dramatic increases in their monthly costs. Because they are paying down interest and capital, their monthly payments did not fall so much when the base rate dropped, while at low interest rates they would have repaid more of their capital.

Even though the standard variable or other rate that homeowners revert to when their deal ends will be higher, it may still be better than remortgaging, say brokers. Compared with remortgaging, Morea says: “There’s no fee, no paperwork and no penalty [on subsequent overpayments or remortgages].”

However, the higher the “go to” rate, the more a remortgage could be worth considering (see table above). The lowest remortgage rates start at around 2 per cent, with most trackers from about 3 per cent and fixed rates from 4 per cent.

Lenders with customers coming off trackers are also likely to offer their borrowers new deals that could be attractive, said Boulger, particularly for those with limited equity in a property.