Tracker mortgage `still best deal`

Tracker mortgages are being recommended by a leading consultant on the grounds that interest rates are likely to stay low for the foreseeable future.

It follows a Bank of England warning in its quarterly inflation report that the UK will suffer a "slow and protracted" recovery from the recession.

Says Ray Boulger, senior technical manager at John Charcol: "Today's report reaffirms the fact that rates look like they will stay low for longer than expected.

"At the moment, for people who do not need the comfort of a fixed rate, trackers offer better value."

But borrowers should hedge their bets by avoiding early-redemption penalties so that they have the option of moving to a fixed deal when rates start to rise.

HSBC has the best tracker, with a rate of 2.95%, or 2.45% above the base rate, for the mortgage's term with no early-redemption penalties, providing homeowners have a 25% deposit and pay a £799 fee.

The best five-year fixed-rate deal available is currently 4.99%, being offered by the Co-operative Bank to people who have a 25% deposit and pay a £995 fee, meaning the base rate would have to rise to 2.5% just for the rates to be similar.

In June, commentators advised homeowners to lock into a five-year fixed-rate deal before interest rates start to rise.

However, many revised that advice in July when lenders began to hike the cost of their fixed-rate deals in response to increases in swap rates, upon which the mortgages are based.

Figures released by the Bank of England show that the average cost of a five-year fixed-rate mortgage for someone with a 25% deposit had jumped to 5.7% during July, up from 5.54% in June.

This was the highest level since October last year, when the Bank of England base rate was 4.5% and lenders were responding to the fall out from the collapse of US investment bank Lehman Brothers.