Discount Mortgages versus Tracker mortgages Friday, 25th September 2009

It increasingly looks as if interest rates will remain low for at least two to three years on the back of a very slow economic recovery. It is therefore logical advise to clients to take a variable rate mortgage, as the differential between fixed and variable rate pricing is too high at present.

And there is evidence in the market place that fewer borrowers elected to take a fixed rate in August.

It seems that borrowers taking larger mortgages were particularly attracted by variable rates. However there are indications that the proportion of clients choosing a fixed rate is now stabilising.

There are a number of people now taking discount mortgages rather than trackers reflecting in part some very cheap discounts but also a view on the relative merits between tracker and discount rates. Previously trackers were preferred to discounts off SVR, to provide borrowers with certainty that their mortgage rate would follow Bank Rate. This followed lenders increasingly failing to pass on Bank Rate cuts in full and has since been a major benefit to borrowers, especially over the last year.

But what has been evident lately is that with most SVR rates now between 4% and 6%, and the most expensive at 6.45%, the spread above Bank Rate is so large that it is now more likely to narrow than widen from here, with discounts now likely to perform at least as well as trackers, and in some cases better over the medium term.