The safest variable mortgage around

These clever mortgages not only allow you to take advantage of the record low base rate, but offer an easy escape route if things get hairy!

When will interest rates rise?

That’s the question anybody looking to take out a new mortgage has been asking themselves for some time. Should you make the most of low base rate and go for a tracker? Or should you go for the safer option of a longer-term fixed rate?

Crystal ball gazing

We got something of a clue with the publication of the minutes for July’s meeting of the Monetary Policy Committee. This is the group that meet each month to decide what to do with Bank Base Rate, and for the second straight month there was some division. In June, Andrew Sentance became the first MPC member to vote for an increase in Base Rate in two years, citing concerns over rising inflation.

Some pundits suggested that other members would soon follow him, given fears over inflation increased escalated following the Coalition’s Emergency Budget, raising the potential prospect of a rise in Base Rate by the end of this year.

However, those fears may have been a bit premature. While Sentance again voted for a rise in July, none of the other members were swayed away from their position of keeping Base Rate at 0.5%.

Slowly rising base rate

The accepted wisdom, as it has been for some time now, is that Base Rate will remain low for at least another year, and even when it does start to increase, it will do so only in small steps.

This obviously makes variable mortgages far more appealing – variable deals are far cheaper in terms of the interest rate you’ll pay than fixed rates at the moment, and if Base Rate does only move northwards at a slow rate, you won’t have to worry about a sharp payment shock anytime soon.

But what if...

Maybe I’m just paranoid, but I still can’t get the “What if...” question out of my mind. What if that accepted wisdom turns out to be horribly wrong?

It wouldn’t be the first time base rate expectations were off the mark – all the experts agreed that base rate would only increase a couple of years ago, only for the credit crunch to strike, and base rate to plummet.

What if rather than small, incremental rises, something unforeseen happens and base rate jumps upwards sharply? If you’ve signed up to a two or three-year tracker mortgage, you will probably have to fork out thousands of pounds in early repayment charges to get out of it.

Hedging your bets

Thankfully there is a mortgage that allows you to take advantage of low base rate, but offers a decent exit plan should things get a bit tricky – the lifetime or term tracker.

These mortgages are ace. They track the base rate plus a certain percentage for, you guessed it, the entire lifetime of the mortgage. So rather than reverting to the SVR after a couple of years (which may be far higher than your initial rate) it will stay at the same level for as long as you have the mortgage.

What’s more, term trackers don’t tend to have early repayment charges, so you can leave the deal at any time without having to worry about forking out thousands of pounds. With a term tracker you can just sit on your lovely low rate until the base rate rises to a sufficient level that you think it’s time to go with the safer option of a fixed rate.

You really can have your cake and eat it.

Ok, so you’ll probably pay a slightly higher rate for a term tracker than, say, a two-year tracker, but I reckon it’s worth it for the extra peace of mind.

15 terrific term trackers

More: Why you should ditch the SVR  | The most affordable UK cities to rent!

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.