Tracker Mortgages

What is a tracker mortgage?

Tracker mortgages work by following the base interest rate. The mortgage interest rate is set to be the Bank of England base rate plus a percentage defined by the mortgage lender. Any change in the base interest rate also changes the interest rate for a base rate tracker mortgage.

In practise this means that if the Bank of England base interest rate decreases, the mortgage interest rate decreases which leads to lower monthly repayments. A base rate increase has the opposite effect and results in higher payments.

The Bank of England base rate is reviewed once a month at a monetary policy committee meeting.

Advantages and disadvantages of tracker mortgages

Pros

• Any decrease in the Bank of England base rate instantly lowers your repayments
• You don’t have to remortgage, saving you time and money
• The interest percentage you pay on top of the base rate is fixed and can’t be modified by the provider.

Cons

• Any increase in the base rate will increase your payments
• The amount you pay monthlty can vary, unlike fixed rate mortgageswhere it is fixed for the length of your mortgage term
• The interest rates offered by lenders are not very interesting at the moment because of the credit crunch

How high is the interest percentage added to the base rate in a tracker mortgage?

This will vary depending on the mortgage provider. It’s normally possible to obtain a deal for less than 1% above the base rate. Since the start of the credit crunch, providers do not lend money as easily as they used to, as a result it isn’t uncommon these days to find tracker mortgages with an interest rate 2% above the base rate. This applies especially to first-time buyers or borrowers that require a mortgage loan with a high LTV, as these applicants are viewed as presenting a higher risk to mortgage providers.

Because of the wide choice available from mortgage providers, we would strongly advise that you speak to an independent financial adviser to find out what tracker mortgage rates are the best based on your situation.

Is there a best time to remortgage if you have a tracker mortgage?

It could well be the case that you’ll never have to remortgage if you choose a base rate tracker mortgage. In the case of lifetime tracker mortgage, the percentage on top of the Band of England’s base rate is fixed and can’t be altered by your mortgage lender. The only reason to remortgage would be to choose another mortgage type for example a fixed rate mortgage.

In the case of standard variable rate mortgages however, even if the mortgage interest rates tracks the base rate, the mortgage provider can modify the rate as they wish. For example, this means that if on a given month the Bank of England’s base rate goes down, the mortage lender can choose to keep the mortgage interest rate as it was, so that you end up having to pay the same amount as when the base rate was higher.

Having to remortgage costs time and money. Arrangements fees alone can cost more than £10,000 if you remortgage regularly every 2 years for a 25 years term mortgage.

A lifetime tracker mortgage could save you having to do this. The only thing you have to worry about is the repayment amount, as this is dictated by the current Bank of England’s base rate.

What are discount tracker mortgages?

A discount tracker mortgage is a tracker mortgage where the percentage you have to pay in addition to the base rate is reduced for the initial years of the mortgage term (typically 2 or 3 years). The discount interest rate can be for some deals under the base rate. When the discount period finishes, the discount base rate tracker mortgage will behave just like a conventional tracker mortgage.

With a discount base rate tracker mortgage you may lose one great benefit normally connected with a lifetime base rate tracker mortgage: you could be tempted to remortgage for a more competitive tracker mortgage or to change type of mortgage. Although the discount rate is usually interesting during the discounted years, the rate offered after the discount period could not be as interesting as if you selected a lifetime base rate tracker mortgage in the first place.

A discount tracker mortgage usually offers a very good interest rate at the start of your mortgage term, but it may not be the ideal choice on the long term. It is therefore crucial that you talk to an independent financial adviser to find out if a discount tracker mortgage is the ideal solution to save money.

What is an offset tracker mortgage?

Offset tracker mortgages are packages offered by mortgage lenders where the mortgage comes together with a saving account. You are charged interest on the difference between your mortgage debt and the amount of money in your savings.

This way of doing things has got some tax advantages. In a standard saving account, you must pay tax on tthe interests. With an offset saving account, you don’t have to pay tax on the interest, instead the money you save is from less interest on your mortgage debt.

What are the additional advantages with tracker mortgages?

Some tracker mortgages have some flexibility, allowing you to increase or decrease your payments, or even take a payment holiday. This is a helpful feature if the base rate rises and you are left with higher monthly payments.

What are the fees I will have to pay with tracker mortgages?

There are usually no early redemption charges involved for a tracker mortgage. An early redemption charge is the fee you have to pay if you change your mortgage before the end of yourmortgage term, although you could have to pay fees if you change your mortgage during the discount period.

With some deals you may be charged an arrangement fee. You will normally get cheaper mortgage rates if you pay an arrangement fee.

There are normally valuation fees and legal expenses involved with with a base rate tracker mortgage, although your lender sometimes have some special mortgage deals (such as remortgage deals) for which the fees do not apply.

What are the risks of tracker mortgage?

If you go for a tracker mortgage there’s constantly risks that the base rate could unexpectedly increase, leaving you with higher monthly payments.

It is hard to predict what the rates are expected to be in the next couple of months. A tracker mortgage is by definition more unpredictable compared to a fixed rate mortgage. The benefit is that if the base rate stays low you could save a lot in the long term.

Who should choose a tracker mortgage?

The ideal candidates for a base rate tracker mortgage are borrowers who are flexible and are able to afford increased monthly payments if the Bank of England base rate suddenly goes up. It is a reasonable choice for people who do not want to remortgage throughout the life of their mortgage, as it is usually done with other mortgage types.

What other mortgage types could I be interested in?

If you want fixed repayments you should consider fixed rate mortgages. Variable rate mortgages have some commonality with tracker mortgages, while capped mortgages are a middle ground between fixed and variable rate mortgages.