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Tracker mortgage Guide
Everything you need to know about tracker mortgages
What is a tracker mortgage?
A tracker mortgage is a type of variable rate mortgage where your interest payment fluctuates depending on the base rate used by the lender, which, in most cases, is the Bank of England’s base rate.
Type of tracker mortgages:
A fixed-term tracker tracks the base for a fixed period of time, typically between two and five years. After the fixed period you’ll move onto the lender’s variable rate, which is usually higher. You can either choose to remain on the lender’s variable rate or remortgage.
Lifetime tracker mortgages
A lifetime tracker mortgage tracks the base rate throughout the entirety of the term, typically 25-35 years. Due to the length of the mortgage term, you don’t need to keep paying early repayment charges to change deals. However, a lifetime tracker can be risky because you can’t predict interest rates rises and decreases.
How does tracker mortgage work?
A tracker mortgage typically works with an interest rate that is marginally lower or higher than the current Bank of England base rate. It increases and decreases when the interest rate changes by the Bank of England (BOE).
An example – Using 2.25% as an example BOE base rate –
If you take out a tracker mortgage that is BOE base rate + 2% (4.25%), and the BOE reduce the base rate to 1%, your monthly payments will now be calculated at an interest rate of 3.25% (made up of the 2% lenders rate and the new 1.25% BOE rate). However, if the BOE chooses to increase the base rate to 2.5%, your mortgage payments increase to reflect the new interest rate rise.
What is a base-rate tracker mortgage?
A base-rate tracker mortgage tracks a base rate set by the Bank of England. The interest rate decreases or increases in line with the Bank of England base rate.
Are tracker mortgages better than fixed-term rate mortgages?
It depends on the market conditions at the time of getting a mortgage and your current circumstances.
A tracker mortgage can be better if you foresee a drop in interest rates and think you might capitalise as a result. Unlike fixed-rate mortgages, where you’re locked into the interest rate for a set period, a tracker follows the base rate and adjusts accordingly.
Another benefit is that you could set yourself a budget, and if the base rate decreases, you still pay within your budget each month and make overpayments to reduce the balance of the loan sooner. However, be sure to keep within your early repayment allowance to prevent being charged.
All this being said, a fixed-term rate is the bread and butter of mortgage products because they allow you to pay the same amount over a fixed period of time. When interest rates are low and the forecasts show an increase in the base rate, you will still only pay the agreed fixed amount, allowing you to safeguard yourself from interest rate increases during the fixed period.
What happens when a fixed term comes to an end?
When your fixed term comes to an end, you’ll go onto the lender’s variable rate. This is usually higher than the initial product. The rate still uses a base rate set by the Bank of England, but the lender will be able to increase or decrease the rate if they choose.
What are ‘collars’ and ‘caps’?
A “collar” is the minimum amount of interest you must pay, regardless of how low the Bank of England base rates fall. It protects the mortgage and lender if ever there are negative interest rates or rates that are so low they become unsustainable.
A “cap” is the maximum amount of interest you must pay. This means if market conditions were to become volatile, the cap offers you some protection from your mortgage payments becoming sky high.
How to apply for a tracker mortgage?
You apply for a tracker mortgage in the same way as you do with any mortgage. Make sure the lender you’re applying with offers a tracker as a valid option.
Is the mortgage in principle part of the tracker mortgage application?
Yes, a mortgage in principle (MIP) is part of any mortgage application. An MIP (sometimes called a decision in principle or agreement in principle) is simply a quick way to check if you can borrow with a specific lender without a full credit check.
How to choose the best tracker mortgage?
If you’re unsure if a tracker product is right for you, consult your broker or mortgage advisor about the best options for your needs.
What are the benefits of tracker mortgages?
A tracker mortgage offers you an interest rate that can go down or up. That means when the base rate is low, a tracker can be cheaper than fixed-rate deals. Tracker mortgages don’t generally have an early repayment charge, which makes it easier to remortgage if you want to switch quickly or if the base rate changes suddenly.
If you take out your mortgage when the BOE rate is high, your monthly repayments will decrease as the BOE rate begins to decrease. It means the funds you have surplus from the lower monthly payments could be used to make lump sum payments to the mortgage, which will reduce your overall balance.
What are the disadvantages of tracker mortgages?
The disadvantages of a tracker mortgage are the flip side of the benefits because you monthly payments can also go up when BOE rates increase this means that the loan that was once affordable now becomes too much for your finances to handle.
Some lenders offer tracker mortgage with a “cap” as explained above, this will allow a maximum amount to be applied which protects you to a certain extent. The other disadvantage is that some lenders offer a “collar” type of tracker which sets a minimum amount of interest you must pay, however this does to protect you against your monthly payments from sky rocketing should the BOE increase the base rate significantly.
Is tracker mortgage a good idea?
Not much is known about a tracker mortgage and whether they are a good idea for the applicant to pursue. It’s not common for a tracker mortgage to be an option in the market for most lenders as they tend to offer a standard fixed-rate mortgage term or interest-only rate mortgage.
A tracker mortgage is where the interest rate charged is dependent on the Bank of England base rate. If the rate is low, the applicant may not pay as much as a normal fixed-rate mortgage, meaning their monthly payments will be lower and more affordable. In this scenario, taking out a tracker mortgage is a good idea.
If the Bank of England base rate is high, then the applicant could end up paying more each month than they would normally do on a standard fixed-rate mortgage product. The Bank of England base rate can change quarterly, which is why you’ll need to keep an eye on this throughout the year and see how this changes your mortgage payments.
Are tracker mortgages cheaper than fixed-rate mortgages?
It’s not uncommon to see fixed-rate mortgages offered for higher than a tracker mortgage. This is due to the rate being locked at a higher percentage for a certain amount of time or the term of the product, meaning you know exactly what each month’s mortgage payment will be for a certain amount of time.
Tracker mortgages are reliant on the Bank of England base rate and whether it’s high at the time or low. If the base rate is low, a tracker mortgage could be cheaper than a fixed rate. But at any point in the product life-time, the price could change if the base rate increases and could result in the tracker being more expensive than a fixed-rate product.
Fixed-rate mortgages often have Early Repayment Charges (ERCs), but some tracker products don’t. Confirm with the lender if the product includes ERCs, as this could impact the ease of switching to a fixed rate when the tracker rate becomes more costly. Without ERCs, there would be no extra charges when compared to a fixed-rate product.
How long does a tracker mortgage last?
When looking at tracker mortgages and wanting to know, “how long does a tracker mortgage last?”, you’ll need to look at the product guide of the specific lender, as they can last for two or five years depending on the specific product rate and code.
You may also see a product that is a lifetime tracker and lasts for the length of your mortgage term. This means you will also have the same type of product for the length of your mortgage and won’t be moved onto a standard variable rate (SVT). Consequently, you don’t need to do a product transfer, although you’ll still need to keep an eye on the product and the interest rate as this can change due to it being a tracker mortgage product.
Who is eligible to apply for a tracker mortgage?
In the UK, tracker mortgages are available for both individuals and company applications and can be viewed on any lenders website under their product guide. Depending on the lender, you may also be able to apply to them directly or you may need to apply via a broker.
Consider each lender’s qualifications and ensure you meet them before applying to ensure you’re eligible. Contacting the lender means you can get the necessary information on whether you meet their criteria and can apply for the tracker mortgage product.
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