On a Tracker? What a Base Rate Rise on 5 November Would Mean for You
Three Bank of England members voted to raise rates in September, and 5 November is next. If you're on a tracker, here's what a quarter-point rise would cost and what you can do now.
When the Bank of England met in September, it held Bank Rate at 3.75% – but the vote was 6–3, with three members wanting a rise to 4%. The next decision is on 5 November, and the talk in the market is of a rise rather than another hold. If you have a tracker mortgage, that is not background noise. It is your monthly payment.
Most of my conversations lately have been about fixed rates, so I thought it was time to speak directly to tracker borrowers.
Where things stand this week
Bank Rate is 3.75%. According to Moneyfacts figures reported this week, the average two-year fixed rate is around 5.96% and the average five-year fixed is about 5.99%. Those are headline averages across the whole market, so the best deals for borrowers with larger deposits will be lower, but they show how close fixed rates are to 6%.
I should be clear: nobody knows what the Bank will do on 5 November. Market pricing can change quickly with each inflation or jobs figure. What I can say is that a rise is a realistic possibility, and it is sensible to plan for it rather than be surprised by it.
How a tracker actually works
A tracker follows Bank Rate at a set margin above it, for example Bank Rate plus 1%. When the Bank moves, your rate moves with it, usually within a month. That works in your favour when rates fall and against you when they rise.
Some trackers have a collar, a floor below which your rate cannot fall, and a few have a cap on how high it can go. Check your mortgage offer or latest statement, because the small print matters more than most people realise.
What a quarter-point rise would cost
Let's use a simple example: a £200,000 repayment mortgage with 25 years left. At a rate of 5.00%, the monthly payment is roughly £1,169. If your rate rose by 0.25% to 5.25%, it would be roughly £1,198 – about £29 more a month, or around £350 a year.
That is manageable for many households, but rates do not always move one step at a time. Two or three rises would add up, so I always suggest working out what your payment would be at 1% or even 2% higher. If that number makes you wince, you need a plan.
Your options if you are on a tracker
Here is the checklist I take tracker clients through:
- Check for early repayment charges. Many trackers have none, which means you can switch to a fixed rate at any time without penalty. Others do, so read your paperwork first.
- Stress-test your budget. Calculate your payment at 1% and 2% above today's rate and see whether you could cope comfortably.
- Compare a fix honestly. With fixed rates close to 6% on average, fixing today may cost you more than your tracker does now. You would be paying for certainty, and only you can say whether it is worth it.
- Consider a product transfer. If you are with your current lender, a switch can often be done without fresh affordability checks, which is helpful if your circumstances have changed.
- Build a buffer. Even setting aside the extra £29 a month now will soften the blow if a rise does come.
The honest trade-off
There is no right answer that suits everyone. A tracker keeps you flexible and means you benefit straight away if rates eventually come down. A fix gives you a payment you can budget around to the penny. The question is which risk you are better placed to carry.
If you have a healthy income buffer and no early repayment charges, staying on a tracker for now can be perfectly reasonable. If your budget is tight, or a rise would keep you awake at night, certainty is usually worth paying a little for.
Do not wait for the headlines
Lenders often reprice fixed deals ahead of a Bank decision if they expect a move. If you think you may want to fix, the time to look is before 5 November, not after. A short conversation now costs nothing and could save you a good deal of worry.
If you would like to talk through your tracker and what it would mean for you, I am always happy to help.
Kindest regards
Ian
Ian A Moore CeMAP — Director, IM Mortgage Consultancy Limited
Your home may be repossessed if you do not keep up repayments on your mortgage. IM Mortgage Consultancy Limited is authorised and regulated by the Financial Conduct Authority. This article is for general information only and does not constitute mortgage advice; rates and figures quoted were accurate at the time of writing and are subject to change.