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Lack of ERCs key to tracker deals argue brokers

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  • 15/03/2017
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Lack of ERCs key to tracker deals argue brokers
Intermediaries have predicted fixed rate mortgages will continue to dominate the market for the foreseeable future, but highlighted that trackers without early repayment charges (ERCs) retain some popularity.

The latest Financial Advisers Confidence Tracker from Paragon Mortgages makes clear just how popular fixed-rate deals are in the current market. It found that fixed deals accounted for 83% of the cases placed in the final quarter of last year, compared to a paltry 14% of tracker mortgages.

David Sheppard, managing director of Perception Finance, said that he sees little demand for tracker products at the moment. He said: “When you compare a two-year tracker against a two-year fixed, the rates are virtually the same for both right now. So the risk of rate rises on one, versus removing that risk, makes most go for the certainty of their payments that you get with a fixed rate.”

Martin Stewart, director of broker London Money, agreed, pointing out that as we are at the bottom of the interest rate cycle, a tracker mortgage is simple “an increased overhead waiting to happen”.

The importance of an ERC-free offer

Nonetheless, it is an area of the market that has seen some activity. For example, last week Chelsea Building Society launched a new market-leading two-year tracker, with a current rate of 1.15%, and no early repayment charges.

Richard Barker, mortgage product manager at Chelsea Building Society, said: “Our new tracker doesn’t tie borrowers into their mortgage, giving them breathing space to review their options on a regular basis – with the bonus of not being subject to early repayment charges.”

Since then Accord has also launched an ERC-free tracker mortgage.

According to brokers, it is ERCs that are holding back the appeal of many tracker deals at the moment. Sheppard said: “I only really see an interest in a lifetime tracker with no tie ins and there are some of these deals available at the moment. They still have to be compared against a longer term fixed rate each time, but they could offer good flexibility.”

This view was supported by Stewart, who said: “Many clients come to us with a degree of uncertainty around what they may or may not do in the next 12-18 months. The flexibility of a tracker rate with no penalties is therefore ideal for them as it allows them to keep their powder and give them time and space to make important decisions.”

When will things change?

Probably not any time soon – so long as fixed rate deals are priced in the same ballpark as trackers, they will remain the dominant choice according to intermediaries.

There is still room for some product innovation though, if lenders are to improve the popularity of tracker deals. Sheppard concluded: “The other type of tracker rate that could get some interest would be a tracker with a cap. We have not seen one of these for quite some time though.”

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