Battle of the Mortgages: Round 2
Mortgages can be intimidating, especially for a first-time buyer. Even if you’ve been in the property market for a while, re-mortgaging your home can be stressful – particularly when deciding which kind of mortgage to go for. Fixed-rate mortgages and tracker mortgages are the types that are most favoured in the UK. Here we will explore tracker mortgages, including what makes them so good, what holds them back and everything in-between.
Essentially, a mortgage is a loan with interest from a bank or building society given to a potential home-buyer upon which their house is property of the lender until they have repaid the loan in full. Repaying a mortgage loan is usually done in monthly instalments and can come in many different forms. One form of loan repayment is known as a tracker mortgage.
So, what is a tracker mortgage exactly? It’s a type of variable mortgage that follows – or tracks – an external interest rate. This is usually the Bank of England’s base rate. Your mortgage deal will be set at a starting point plus or minus bank base rate so, if your tracker deal was 2% above bank base rate & the bank base rate was 0.75% then you mortgage interest rate would be 1.75%. In this example, whatever happens to the bank base rate your mortgage stays 1% above. So, base rate drops to 0.5%, your mortgage drops to 1.5%. Base rate increases to 1.25%, your interest rate increases to 2.25%.
Tracker rate mortgages can last from one year to the entire mortgage term. Referred to as an introductory period, a one to five-year tracker mortgage can have the lowest interest rates available. Longer, or lifetime, tracker rate mortgages which cover the entirety of the repayment period tend to have a higher interest rate.
Advantages of Tracker Rate Mortgages
Tracker rate mortgages can be very advantageous. One of the main appeals of this kind of loan is the idea that if the external base rate decreases, so does the amount you repay. As well as this, some lenders will allow you to switch to a fixed-rate mortgage if the base rate increases without having to pay a fee. It is worth checking with the lender first hand however, if this is the main thing drawing you to this kind of mortgage.
As previously mentioned, introductory tracker rates (those applied for one to five-year deals) can be some of the lowest available in any kind of mortgage. This could be pleasing for those on a smaller budget or first-time buyers.
Some lenders may also allow debtors to overpay their mortgage if they come into larger sums of money. Overpayments are usually around 10% of any outstanding mortgage balances per year. This means you are not restricted to only paying the monthly repayments agreed with the lender.
Another positive is that most of the time, arrangement fees tend to be lower for tracker rate mortgages when compared with fees for fixed rate mortgages. Also, early repayment charges for this type of mortgage are often less expensive than some other types of property loans.
Disadvantages of Tracker Rate Mortgages
On the other hand, if the base rate increases then so will your monthly repayments. Hence, this type of mortgage is not advised for those who like to know how much they will pay each month and those who like to plan their expenditure beforehand. It is important to ensure you could pay the repayments even if the rate increases.
The lender may apply a collar rate to your tracker mortgage. This is when a minimum interest rate is set on the loan so if the base rate drops below that the interest you pay will not go below the collar rate. As a consequence of this, a collar rate may mean you will not able to take full advantage of the low base rates.
On top of this, if you wanted to pay the loan off earlier or switch to another deal, you will most likely have to pay an early repayment charge. This may be similar for a tracker rate mortgage to a fixed-rate mortgage but may still put some off signing up to this kind of mortgage.
Once a tracker rate mortgage is finished, it is most common that you will be moved to a SVR mortgage. This is the lender’s standard variable rate and is often much higher than a tracker rate mortgage or a fixed-rate mortgage. At this point, it is probably better to look into a re-mortgage to another fixed-rate or tracker rate deal, either with the same lender or an alternative company. This is evidenced by 70% of tracker mortgages coming from those who are looking to re-mortgage.
Although tracker mortgages can seem like the cheapest option which may appeal to many, it can often be misleading. It is key to check with your lender whether a collar rate will be added to the loan, and to establish how much interest is added on top of the base rate. As well as this, is it important to ensure you will be able to continue your monthly repayments should the base rate increase to prevent your home being repossessed.
If this mortgage seems right for you, is it wise to begin with an introductory period mortgage of around two or three years. Unless you’re a property aficionado, it’s probably best to take it one step (or year) at a time.