Looking for a mortgage can be confusing – not only are there countless different rates and terms available but there are also different types of mortgage.
So, how do you choose what’s best for you?
We’ve already looked at what a fixed-rate mortgage is and its pros and cons, so now it’s time to take a closer look at tracker mortgages.
When it comes to mortgages, the clue is often in the name. While a fixed rate is fixed and your repayments won’t go up or down for the duration of the fixed period, a tracker mortgage tracks another rate.
Tracker mortgages usually follow the Bank of England base rate. This is currently set at 0.5 per cent, but – before you get too excited – it’s unlikely that the tracker mortgage you’re looking at will be exactly the same as this. Rather, a tracker is set a certain margin above or below the base rate – typically 1% to 4% above the base rate at the moment. However, in the past when the base rate was higher some tracker rates were below it.
So, if you have a mortgage that tracks 2% above base, currently you’ll be paying 2.5%. If the Bank of England puts its base rate up 1% then your pay rate would increase to 3.5%.
There are different types of tracker mortgage available. Introductory tracker offers usually provide the best rates on the mortgage market, but they don’t last that long, while a longer-term tracker might come at a higher rate. You can also get a lifetime tracker, which lasts for the duration of your mortgage.
Advantages of a tracker
In the past, mortgage rates were usually set by the lender, much as Standard Variable Rates often are now. Whilst lenders usually moved their rate in-line with the base rate, they didn’t always. On some occasions they didn’t pass on all of base rate changes to customers – whether rates were moving up or down. Trackers mean that if base rates drop (or rise) you know that the full amount of the change will be passed on to you.
Tracker rate mortgages tend to offer some of the most competitive deals around at the moment. If you decide to take advantage of an introductory offer, for example, you might find one with a margin of just one per cent above the base rate – so you’d only be paying 1.5 per cent interest on your repayments for the duration of the offer.
On many tracker mortgage deals, you also have the option of over paying. If your tracker rate is currently low, this can be a good option as you can pay more towards your mortgage and reduce the time you’ll be paying it for. Of course, if you are considering this option you should check with your lender that you can do so and that there won’t be any penalties for overpaying.
Unlike a fixed mortgage, a tracker mortgage reflects the movements of the base rate, so if that falls so will your repayments – but it’s worth bearing in mind that there is little or no scope for rates to fall much below their current level. Some trackers have a cut-off that they won’t drop beneath, but there should be some reduction to your repayments if rates fall. This is a pretty key advantage, but it also brings us nicely to one of the main disadvantages of a tracker mortgage.
Disadvantages of a tracker
Just as your mortgage repayments will fall when the base rate does, they will also rise if the base rate goes up. Before signing up to a tracker mortgage, you should carefully work out not just how much you’ll pay on the current rate, but also how much you would pay if it goes up. Your mortgage rate only has to go up a few percent and it could cost you hundreds more pounds for every repayment.
The very nature of a tracker mortgage may also be a disadvantage if you struggle with budgeting or simply want the security of knowing exactly how much you’re paying for your mortgage each month. Because a tracker can go up or down, you don’t have this security. You could pay any money you save when rates are low into a savings account so you have a buffer if rates go up, but this takes careful planning.
If you decide a tracker mortgage isn’t for you once you have started on it, or if rates go up so much your repayments become a stretch, you may be charged an early repayment fee if you make the decision to end your deal and switch to a different one by remortgaging. However, this penalty is usually less than what you can expect to pay if you decide to leave a fixed-rate mortgage early.
Should you keep on tracking?
When your tracker comes to an end (assuming it’s not a lifetime tracker), it will most likely switch to your lender’s standard variable rate (SVR). This will probably be higher than what you’ve been paying and you may experience quite a steep rise in your repayments.
You can stick with the SVR, or you could ask your lender about switching to a new deal. Alternatively you could look for a different lender if you think they can offer you something better.
If you’ve enjoyed the benefits of a tracker mortgage you may be tempted to look for another. Just be aware that while the base rate has been at 0.5 per cent since March 2009, it could change. And because it’s currently so low, if the Monetary Policy Committee does vote for a change to the base rate, it will probably be to put it up. This is something to think about if you’re thinking of signing up to another tracker.
On the other hand, if you’ve been on a fixed-rate mortgage and feel you’ve missed out on taking advantage of low rates, you could consider moving to a tracker now while rates are still pretty attractive. Just be prepared for a potential rise.
Ultimately, of course, the type of mortgage you pick is up to you and will come down to your own circumstances. If you’re thinking of remortgaging, read our guide.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.