Tracker mortgages

5 year tracker mortgage

lifetime tracker mortgage

If you repay the mortgage during the term of the tracker you may have to pay an early repayment charge but some mortgages will permit partial repayments without imposing any penalty.

The tracker mortgage will specify the margin that you will pay above – but sometimes below – the base rate and this margin is fixed at the outset, so your lender cannot increase the margin (as it can with standard variable rates); although obviously the underlying bank base rate or LIBOR may change.

You should also note that some tracker mortgages have a ‘floor’ which specifies the minimum interest rate - or a ‘cap’ which specifies the maximum interest rate - that the mortgage will charge.

The margin charged by a tracker mortgage above the underlying tracked rate will vary according to market and financial conditions. Indeed, since early spring 2008, as the loan-to-value (LTV) percentage mortgage that you require increases so will the mortgage interest rate charged.

Typically the keenest rates are only available for applicants seeking a mortgage for no more than 75% of the property value (this would be referred to as 75% LTV and means that the mortgage borrower either has a deposit, or existing equity in the property, of 25% or more).

As the required LTV % increases so will the margin. So if you need a 90% LTV mortgage you will probably have to pay substantially more than if you require 60% LTV.

Why should I choose a tracker mortgage?

If you are prepared to take a little risk then a tracker mortgage may be suitable because you may see your payments both increase and decrease during the mortgage term.

As tracker mortgages are linked directly to the Bank of England interest rate you do not have to rely on your bank or building society to decide whether they will pass on the benefit of any interest rate cut to you. The Bank of England base rate reduced from 5% in April 2008 to 0.5% in March 2009 whereas very few lenders reduced their standard variable rates by the same amount. What also happened was that the margin charged above the base rate for new tracker mortgages also widened considerably.

If you had a mortgage of £150,000 and had a tracker mortgage charged at 2% above the Bank of England base rate (0.5%) for the last year then you would be charged £3,750 in interest annually. If you had a standard variable rate mortgage with the same lender at 4.99% then the interest charge would have been a massive £7,485; giving a saving of £3,735.

If you are looking for a flexible mortgage that allows you to make unlimited overpayments and also repay your mortgage in full, then certain tracker mortgages will allow you to do this. Although be aware that there is usually a cost for this benefit, and these types of tracker mortgages may be priced slightly higher although lenders regularly offer competitive trackers with no redemption penalties.

As a tracker mortgage is a variable rate, you need to ensure that you are able to afford your mortgage should interest rates increase. This is particularly important given that the Bank of England rate is currently at a historic low and will rise at some time in the future.

A tracker rate at 1.5% above the Bank of England rate would mean that your current mortgage rate would be 2%. If the Bank of England rate increased to 5% then you will find that your mortgage rate increases to 6.5%.

If you are the type of person that likes to work to a set budget every month then you might prefer a fixed rate mortgage as you may find with a tracker mortgage that your mortgage payment may decrease or more likely increase by several hundred pounds.