Is a Tracker Mortgage Right for You?
What is a Tracker Mortgage?
The interest rate on a tracker mortgage is pegged to the Bank of England base rate. So, when the base rate moves so will your interest rate, and your monthly repayments. These mortgages tend to be cheaper than fixed rate mortgages as you don't have the security of knowing exactly what you will pay each month.
Who Should Get One?
If you get a tracker mortgage your monthly repayments will rise and fall depending on what the Bank of England base rate does. If the base rate rises so will your interest rate, making your payments immediately higher. So, making a decision to get a tracker mortgage depends on what you think the base rate is going to do. No-one has a crystal ball to tell them exactly what will happen to interest rates but experts can make educated guesses. You can find out the very latest rate predictions from our panel of experts here. If you believe interest rates aren’t going to rocket, and you could afford it if they did, then a tracker rate mortgage is for you. But, if your budget is tight and you don’t want the worry of rising interest rates the security offered by a fixed-rate mortgage might be better.
How Long Should I Track For?
Tracker mortgage deals typically run for two to five years, or the entire term of the mortgage if it is a lifetime tracker. How long a deal to go for comes down to two things:
What do you think is going to happen to interest rates? If you think they aren’t going to move substantially for three years – go for a three year deal.
How long are you going to live there? If you know you are going to move on in two years time then don’t lock into a longer deal – you’ll be penalised if you want to exit early with most mortgages.
What Additional Fees Will I Pay?
This is the charge levied by the lender for setting up your mortgage. They have been on the rise of late and can now be as much as £2,000. You don’t have to pay that upfront, you can add it to your borrowing, but you’ll then pay interest on it. High arrangement fees aren’t always a dealbreaker. Many low-rate deals carry a high arrangement fee, so if you have a large mortgage you could save money by paying more upfront in return for a much lower interest rate.
Early redemption charges
If you want to leave your deal early many lenders will penalise you. The penalty can by calculated in a variety of ways:
A percentage of the original loan
A percentage of the balance still owed
A percentage of the amount you’ve already paid
A number of months’ interest
A fixed fee
You’ll trigger a penalty if you pay off your mortgage entirely and, sometimes, if you try to overpay.
Some lenders will charge you to close a mortgage once you’ve paid off your debt. It costs lenders around £50 to sort out the paperwork to close a mortgage but, despite the regulator stating that lenders must not profit from exit fees, many charge as much as £200. If you are being charged a fortune complain – first to your lender and if that doesn’t work to the Financial Ombudsman Service.
WARNING – Don’t Get Caught out when Your Rate Ends
Although you may be borrowing money over a 25-year period, unless you went for a lifetime tracker, your special interest rate deal will eventually run out. When it does, in two to five years depending on your deal, you’ll automatically be switched over to the lenders standard variable rate (SVR). In most cases this rate will be significantly higher than the tracker rate you were on. So, don’t be one of the millions of people wasting thousands in unnecessary interest payments – make sure you switch to a new deal. Start looking around three months before your deal ends to ensure you have enough time to switch before the SVR kicks in. You can compare the best deals here.