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Doubt cast over tracker market

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  • 01/12/1999
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The Bank of England's decision to raise UK interest rates has again cast doubt on the long-term fut...

The Bank of England’s decision to raise UK interest rates has again cast doubt on the long-term future of the tracker market.

The quarter point increase, the second in just three months, was widely believed to have been given the go ahead in a bid to stop inflation creeping higher.

However, the Bank’s Monetary Policy Committee (MPC), which has now changed rates 14 times in 30 monthly meetings since it was set up in 1997, made no statement about the reasons for its decision.

Last month the MPC voted unanimously to keep interest rates on hold, but warned that it was waiting for more economic evidence to emerge.

Earlier this month, Government figures revealed a strong economic recovery in the three months to September, with an annualised growth rate of 3.6%. At the same time, Halifax reported house prices had surged in October by 2.8%, their fastest rate since the l980s.

The impact of the increase on the tracker market could be felt in the coming weeks as take-up of the product begins to dwindle.

John Heron, managing director of Paragon Mortgages, said: “The popularity of base rate trackers will reduce when it is clear that lenders’ SVR is cheaper than the tracker alternative.”

The popularity of Paragon’s own tracker range, which is based on three-months’ LIBOR instead of the Bank of England base rate, is often affected by shifts in interest rates and the resulting SVR.

Heron added: “Our tracker range has been available for some 10 years now but its popularity waxes and wanes with the relativity of the SVR to market rates. The function of the tracker product is to give reassurance to the borrower that their interest rate is set against a true market standard. A problem with base rate trackers is that there is no levelling off period. It can change one way or the other on a regular basis and, as a result, it can be an expensive account to run.”

But Jonathan Sadler, general sales manager at Ocwen, said he was doubtful as to whether the rate rise would impact on business levels for sub-prime lenders that offer tracker deals.

He said: “After the last rate rise it was apparent that sub-prime borrowers could still see the benefit in our tracker range and it is the same this time around. Most lenders in the prime market go on SVR which has the potential to rise even if base rates go down. There would have to be a full 1% rise before we would look at altering our marketing strategy.”

Sadler added: “If lenders are able to find the right product placed below SVR then we are likely to see a trend towards fixed rates and maybe even discounts without redemption trails.”

A spokesperson for Woolwich, which launched a new range of tracker mortgages just days after the rate rise, said: “The future of the tracker mortgage is still strong. Customers can still see the benefit of having a product where they can immediately see the rate they will be paying.”

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