Should you switch to a tracker deal with no ERC if you plan to move soon?

Hi,

My son has asked me a tough question. He is thinking of going onto a tracker mortgage when his 5-year fix ends on 31st July. This is because there is no early repayment charge (ERC) on it and if they are planning on moving within the next year then it works out cheaper than fixing for 2 years and paying the ERC. This is assuming they move within say 15 months, otherwise the fix would be better value. The obvious issue is if rates go back up again whilst on the tracker, but hopefully it goes the other way. What would be your advice on this?

Thanks.

You’re right that this is a tough question, largely because no-one knows what interest rates will do in the next few months let alone the next few years. However, your son is considering the right elements aside from interest rate, to ensure that the new deal will give as much flexibility as possible if he decides to move.

Tracker rates are directly pegged to the base rate, so could fall if interest rates begin to dip but so far the Bank of England has held firm. There is an expectation that interest rates will fall in time and consequently fixed rates are already offering lower rates, as they are largely determined by market forecasts.

Fixed rates do typically tie borrowers in with Early Repayment Charges (ERCs) during the fixed rate period. These will generally be charged as a percentage of the amount repaid so can amount to thousands of pounds if the mortgage is fully redeemed.

Tracker rates can carry an ERC as well but there is generally a broader choice of deals that are free of these charges at any time. Aside from those that are hoping for interest rates to fall and a cut to their mortgage payment, borrowers that want more flexibility can find trackers a good option.

Being free of an ERC could allow for more substantial overpayments than the 10% per annum that most deals allow. Alternatively, it could leave options open to make a different product choice at a later date without being hit by a penalty. For example, we saw many borrowers use trackers as a holding position when rates rocketed after the mini budget.

It could also give your son the chance to reassess the entire mortgage when he comes to move. Fixed rates can generally be taken, or ported, to a new home which means the existing deal remains intact and avoids the ERC.

There’s no guarantee what the lender may have on offer for any additional borrowing or even if your son will be meet the existing lender’s criteria for a new mortgage. If they aren’t as generous in their lending as another lender it could result in a need to go elsewhere and face redeeming the mortgage. So although porting is a useful feature it won’t give the blank slate that a tracker could, enabling the entire mortgage to be reviewed at that time.

Ultimately it could well be possible to avoid an ERC but it does make sense to consider whether a tracker will give a greater degree of flexibility if the move is likely in the near term. The final caveat is that it makes sense to consider how well he could cope with higher payments, if the predictions are wrong and base rate doesn’t fall or goes into reverse.