House Doctor: 'Should we get a tracker mortgage? There are some good deals around'

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The Independent Online

Question: With the Bank of England base rate at 0.5 per cent for a year and a half, should we pick a tracker loan for our remortgage? I know rates could rise, but it doesn't look like they will for a while, and we've seen some deals as cheap as 3.75 per cent. Are we "too late to the party" or could the base rate stay low for another year? We're aiming to borrow £144,000 with enough equity (about £36,000) for an 80 per cent loan-to-value mortgage.

Cicely Greene, Bournemouth

Answer: "Will they? Won't they?" is a refrain that has recently been resonating in homes nationwide: whether the Monetary Policy Committee at the Bank of England will raise base rate or not.

The bargain base rate – left unchanged again at 0.5 per cent in August's meeting, the 17th month in a row – has made mortgages more affordable for many.

In particular, trackers that follow base rate have become more attractive given the historically low rate.

For example, for those borrowing 80 per cent of their property's value, Nationwide offers a two-year tracker, priced at 3.88 per cent (base rate plus 3.38 per cent). Elsewhere, the Post Office has a lifetime tracker priced at 3.89 per cent (3.39 per cent over base rate).

However, the longer base rate has stayed at 0.5 per cent, the more jittery those seeking trackers have become.

After all, signing up to either of these deals may look good today but, if base rate were to climb to 4 per cent over a period of five months, say, a 7.38 per cent mortgage rate would cause serious financial harm.

"On the face of it, tracker-rate products look incredible value at present," says Andrew Montlake at broker Coreco.

"In more normal times, we would recommend a tracker rate is still affordable with a 1 per cent rise factored in, but now we recommend a 2 per cent rise is planned for."

To see how much tolerance you have for rising interest rates, broker London & Country has a calculator at www.lcplc.co.uk/calculators/what-will-happen-if-rates-change/.

Last week, the Policy Exchange went as far as to warn base rate could hit 8 per cent by 2012 because of inflation. However, says Melanie Bien at Private Finance, the consensus is for a slower increase in base rate: "Interest rates are at all-time lows so there is only one direction for rates to go."

One alternative, says L&C's David Hollingworth, is to consider a tracker with a "switch to fix" option on offer at lenders including Woolwich, Nationwide and RBS. This allows you to jump ship into one of the fixed rates without incurring a penalty.

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