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The Bank of England’s rate cutting spree has come to an abrupt halt. After a five month policy flurry which saw rates drop to 0.5% there’s little room for manoeuvre from this historically low rate.

Instead the Bank has focused its efforts on pumping hundreds of billions of pounds into the economy through its quantitative easing programme, but where does this leave the average homeowner and how predictable are the Bank’s next steps likely to be?

Policy matters

The Bank has a mandate to set monetary policy for the country which in simple terms means they decide how much money is floating around the system and how expensive it is to borrow this money.

One of the key features of this system is the Bank of England base rate which is a key barometer for the cost of mortgage borrowing and many mortgage products are linked directly to this rate. The decisions of the Governor, Mervyn King and his Monetary Policy Committee therefore have a significant impact on the cost of home loans.

The rate debate

The low base rate has meant that borrowers have been able to take advantage of previously unthinkably cheap tracker mortgage finance. HSBC and Woolwich, two of the country’s biggest lenders, have been offering tracker mortgage deals at 1.99 and 1.98 per cent respectively. Up until last September borrowers could expect to pay at least 5 or 6 per cent on tracker mortgages. These deals will only stay this cheap while the base rate remains low however and will rise when base rate climbs.

Cash in or play it safe

The big question for anyone planning to remortgage in the coming months is whether to take out one of these tracker deals while rates are low. The repayments will be low but there is a danger that rates could rise and because the deals tie customers in for a specific period they could find themselves stuck paying bills they did not expect.

The overpay play

These mortgages, while a bit of gamble, do have a further advantage. With their basic cost so low, borrowers should in theory be able to overpay their debt. So, instead of making interest payments, borrowers are quickly able to reduce their capital debt which could significantly reduce the amount of time it takes them to pay off their mortgage completely.

Rate spike

Borrowers considering taking out a tracker mortgage need to make up their mind as to whether rates are likely to rise in the near term and how far they are likely to rise when they do.

Most economic commentators believe that rates are unlikely to rise this year while the economy is still in recovery mode but beyond that it is difficult to predict.

Rolling the dice

Tracker mortgages are going to remain the cheapest form of mortgage finance for sometime to come but borrowers need to be careful that they understand the consequences of a tracker product. The rate could rise, and rise quickly meaning that their bills would shoot up. However, most commentators are unable to see rates rising anytime soon so if you can afford to take a gamble it could be worth considering a tracker product over a traditional fixed rate deal where there is certainty over repayments, but they will be higher.