We are often asked by clients “What is a tracker mortgage?” And then, should they have one?
You know we are going to tell you that advice on whether a tracker mortgage is right for you will depend on a number of factors, but let’s tackle this in order.
So, what is a tracker mortgage?
In essence, it is a mortgage where the interest rate tracks the Bank of England base rate. The base rate is the rate at which banks and other lenders are able to access money. Usually a tracker rate is done on a percentage, such as 1%. So, if the base rate is 0.75% (which it is at the moment!), your tracker mortgage interest rate would be 1.75%.
The thing to understand here, is that the rate tracks the base rate. So every time the base rate goes up so does your mortgage rate. But equally, if the base rate reduces so does your rate.
Some tracker mortgages are for a fixed term – commonly two, three or five years. But you can obtain tracker mortgages for the lifetime of your mortgage.
What effects the base rate?
That’s a million dollar question! We could devote quite a lot to this, but for the purposes of our focus today, the base rate is changed in line with the economy. When we are in recession the rate tends to be low, to try and encourage spending, when confidence is high, or inflation increases, the base rate is increased, to try and control the rate of inflation. Inflation is what controls the price of most items we buy – food, petrol and so on.
The base rate is reviewed on the first Thursday of every month. That doesn’t mean it always goes up or down then – it’s actually been changed very few times in the last five years.
Should you have a tracker rate mortgage?
That depends on your personal circumstances. If you are considering moving house, a tracker mortgage could work well for you. There are often no redemption penalties, so you won’t pay a fee if you pull out of the mortgage before the end of the term.
Equally, if you need to be confident of your monthly outgoings, you may find the uncertainty of the rate you will be paying to be too much for you. In that case, a fixed rate mortgage is better.
Tracker rates can be less expensive than fixed rate, as the saving on rate adjustments is always passed on by the lender. Standard variable rate mortgages are determined by the lender, not the base rate, so may be more expensive. Do some shopping around to find out what is available on the market right now, to suit your needs.
You need to do your sums too. Sometimes, there is an upfront arrangement fee, and some lenders charge valuation fees to verify the value of your property. All of this needs to be factored into any potential savings you think you would gain, before making the final decision. In the long run, you may find you are going to pay more not less, when additional expenses are factored in.
As always, we are very happy to run the numbers and advise you on the right mortgage for you. Please contact us on 01344 875 310 to arrange a chat.