Interest rates are currently on a downward trend, which presents an important decision for mortgage borrowers whose current deals are nearing their end.

Most people with mortgages in the UK are on fixed-rate deals, typically choosing either a two-year or five-year fix. According to UK Finance, of the 7.1 million households on fixed rates, around 1.6 million will need to move to a new deal within this year.

In addition to those on fixed rates, around 540,000 borrowers are currently on their lender’s standard variable rate (SVR). This is the default rate people move to when their fixed deal ends and they don’t arrange a new one.

There are also around 591,000 households on tracker mortgages. These loans follow the Bank of England’s base rate, with an additional percentage on top. For example, a tracker might be set at base rate (currently 4.25%) plus 0.5%, resulting in a total rate of 4.75%.

Trackers appeal to many borrowers because they often come with no early repayment fees. This flexibility means they can be paid off or switched at any time without incurring penalties.

Given the outlook for falling interest rates, there may now be a stronger argument for choosing a tracker mortgage. Forecasts suggest rates could drop further over the coming year.

Just yesterday, the Bank of England implemented its fourth interest rate cut since August of last year. Markets are currently anticipating three more cuts of 0.25 percentage points each before the year ends.

If those predictions come true, the base rate could fall to 3.5% by Christmas. Some experts believe it might drop even lower or at a faster pace.

Analysts at Morgan Stanley are forecasting the base rate to reach 3.25% by the end of 2025. They also expect further cuts in early 2026, with interest rates potentially settling at 2.75% in the first half of that year – and remaining at that level for the foreseeable future.

Analysts at Morgan Stanley believe the UK economy will face significant challenges this year, which may lead the Bank of England to cut interest rates more aggressively than previously expected.

They suggest that weaker GDP growth will be made worse by a decline in household disposable income, putting further pressure on the economy.

In a similar vein, economists at Oxford Economics predict that the Bank of England base rate will eventually fall to 2.5% by 2027. They also expect it to remain at that level throughout 2028 and 2029.

Their forecast shows a gradual decline in interest rates, with a drop to 3.75% anticipated by the end of this year, followed by a further reduction to 3% in 2026, and finally settling at 2.5% in 2027.

Should you take a tracker mortgage? 

At present, tracker mortgages tend to be more expensive than fixed-rate options. This means borrowers would need to accept higher costs initially, in the hope of future savings – a strategy that carries no guarantee.

Nationwide Building Society is currently offering some of the most competitive fixed-rate deals, with both two-year and five-year fixes available at 3.84%. These deals come with a fee of £1,495 and are offered to those remortgaging with at least 40% equity in their property.

For example, a homeowner taking out a £200,000 mortgage over 25 years would be paying around £1,038 a month on the Nationwide deal, excluding the upfront fee.

In contrast, one of the most attractive tracker deals available is from Santander. They’re offering a two-year tracker at 4.35% (base rate plus 0.1%) for borrowers with 40% equity. While it comes with a £1,058 fee, there are no early repayment charges.

This tracker would result in monthly payments of roughly £1,095 on a £200,000 mortgage over 25 years. However, if interest rates were to fall to 3.25% by year-end, the effective mortgage rate would drop to 3.35%, reducing monthly repayments to about £985.

Should Morgan Stanley’s forecast prove accurate and rates fall to 2.75% in the first half of next year, tracker mortgage rates could drop to 2.85%, bringing monthly payments down to approximately £933.

If that scenario unfolds, borrowers may then be able to secure even lower fixed-rate deals than those currently available, potentially locking in greater long-term savings.

However, this all hinges on economic predictions holding true. Any number of global or domestic factors – from rising inflation to economic downturns – could disrupt these forecasts.

It’s important to approach interest rate forecasts with a degree of scepticism. At the start of last year, for example, many in the market were predicting six or seven rate cuts in 2024 – in reality, only two actually took place.

According to property finance expert Chris Sykes, tracker mortgages are certainly an option worth considering. That said, fixed rates remain by far the most popular choice among borrowers.

Currently, tracker deals tend to come at a premium of around 0.5% to 0.75% compared to similar two-year fixed-rate products. This leads to a common question: when will tracker rates drop below fixed rates, and will it happen quickly enough to make them worthwhile?

Sykes points out that if it takes six months for the base rate to fall by 0.5% to 0.75%, then borrowers would have paid more for the tracker in that time. For it to become cost-effective, the base rate would need to drop further – and sooner.

Despite the uncertainty, opting for a tracker could be a sensible move for those who value flexibility. Trackers typically come without early repayment charges, which can be ideal for people who may need to switch products or pay off their mortgage early.

Aaron Strutt from Trinity Financial explains that many borrowers who choose tracker rates do so because they anticipate selling their home or expect changes to their financial or personal situation.

One example is Halifax’s two-year tracker, which follows the base rate plus 0.11%. Although it carries a £1,499 arrangement fee, it comes with no early repayment penalties.

Similarly, Santander offers a two-year tracker mortgage set at 0.1% above the base rate, available for loans up to £1.5 million. Like Halifax’s deal, this product also has no exit fees, offering added flexibility.

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