Demand for tracker products increased in Q1 2022, and despite rate volatility lenders should provide a choice of variable products to meet consumer needs, according to Jeff Knight (pictured), director at the Mortgage Marketing Forum.
UK Finance data reported that approximately 13% of new mortgages in the first quarter of 2023 were variable rates, while the Financial Conduct Authority (FCA) had this figure at 17%, compared with about 5% in 2022.
Although fixed rates continued to make up the vast majority of new business, Knight suggested that this could in part be due to a lack of awareness – or even outright suspicion – around tracker products among consumers, given the current market volatility.
This lack of understanding, he added, was only being worsened by scaremongering headlines and inconsistent data.
Consumer caution around tracker products is arguably well-founded, considering the strong chance that rates will go up further, and even that they will defy current predictions around resettling.
However, Knight pointed out that for those with the right risk appetite, who were willing to bank on rates dropping once more, this could mean saving the client from being stuck watching rates drop back down to a more manageable level.
Knight said: “No one really knows what will happen with interest rates in the future. Most of us who made predictions for this year got it wrong.
“Whilst fixed rates remain the popular choice, more variable rates could provide greater choice for intermediaries and their clients.
“For some borrowers, there may be a preference to have more flexibility and fix in the future.”
He added that this increased choice would work in concert with the Consumer Duty regime, while also helping lenders maintain stability rather than having to reprice products all the time.
Knight said: “In a changing market, different solutions need to be created by looking at the challenges through a different lens.
“To put the market in perspective, in the run up to the Credit Crunch (the last time we saw interest rates of this level) about one-third of new mortgages were variable rate products.
“Whilst we need fresh thinking, a quick look at the past can help with this.”
A spokesperson for mortgage broker Oportfolio, said: “We at Oportfolio are actively encouraging a lot of our clients to take more flexible mortgage options.
“For many, fixing on a particular rate for a long period of time doesn’t make sense in a lot of scenarios.
“Even if you are planning to stay put in your property for the foreseeable future, choosing a tracker rate can be much more cost effective and offer a lot more flexibility for fixing in the future.
“Especially if we see the base rate come down within the year.
“When it comes to fixing specific rates, we are generally recommending 2-year fixes with the prediction that rates will be more competitive in by the time the product comes to an end.”
Nicholas Mendes, mortgage technical manager at John Charcol, said: “Whether a fixed or tracker mortgage is more suitable for you will depend on your unique situation and attitude to risk.
“Despite average fixed rates edging passing 6% there are sub 5% fixed rate deals, which mean mortgage holders get the comfort of stability and not be tied into a deal over a longer period in the event rates do reduce.
“When compared to tracker rates, while the gap in narrowing, trackers do not lead best buy tables, so the choice will be down to the mortgage holder’s circumstances and plans, such as potentially looking to make overpayments higher than the typical 10% allowance in a fixed rate.
“Mortgage holders have been accustomed to being on a fixed rate and those who are considering opting for a variable product in the hope rates reduce in the short term need to understand the risks as well as the impact in the event we see further increases before they fall.
“Schroder have forecasted base rate to reach 6.5% by the end of the year with a further 0.5% rise in August and September.
“Mortgage holders will also be leaning on their mortgage broker for advice and predictions for the future, with all honestly can anyone at this this moment in time.”
