Ultimately, whether or not a tracker mortgage is best for you will be determined by your ability to finance your mortgage amount if interest rates rise. This post will teach you about tracker mortgage rates, how they work, and everything you need to know about lifetime tracker mortgages.
Understanding Tracker Mortgage
A tracker mortgage has an interest rate that moves in lockstep with the BOE base rate. This means that your monthly payments may decrease if the base rate decreases or increase if the base rate increases.
Additionally, it has an interest rate that is set at a percentage above or below the Bank of England base rate and adjusts proportionately for the length of your loan. For example, you may discover that the optimum mortgage for you is set at the base rate + 2%. If the base rate is 1%, your monthly payments will be computed using a 3-percentage-point interest rate. If the base rate rises to 1.5 per cent, the interest rate used to calculate your mortgage payments will jump to 3.5 per cent.
Read Also: Shared Ownership Mortgages
How it Works
There are mortgages that follow the base rate for a set period of time, such as two or five years. A lifetime tracker, on the other hand, will monitor the base rate for the whole period of your mortgage loan.
Furthermore, introductory tracker rates might be among the lowest possible mortgage interest rates. However, like with any variable rates, they can rise as well as fall. In addition, if you remortgage or repay your mortgage within the introductory term, you will almost certainly be charged an early repayment charge. If you have a lifetime tracker mortgage, there may be an early repayment charge for a period of time after you take it out.
Most tracker mortgage rates allow you to make overpayments without incurring an early repayment charge – typically, you can overpay up to 10% of the outstanding mortgage balance per year.
Again, if you’ve moved from an introductory fixed or tracker rate to a tracker rate, there aren’t usually any early repayment charges if you want to overpay, refinance, or pay off the mortgage early (although check with your lender prior to making any decision)
Tracker Mortgage and Interest Rates
Tracker mortgage rates are typically set at a level somewhat over the set rate, rather than exactly matching the interest rates they follow.
It’s a good idea to shop around for introductory offers, such as a tracker mortgage that pays the Bank of England’s Base Rate + 1%. So, if the current base rate is 0.75 per cent, the rate you’d pay would be 1.75 per cent.
What Exactly are ‘Collars’ and ‘Caps’?
Some tracker mortgages include a rate ‘collar’ or ‘floor.’ This means that even if the base rate falls, your mortgage rate will not fall below a certain level. For example, if your tracker had a collar of 1%, your rate would remain at 1% even if the base rate dropped to 0%.
Some trackers have a ‘cap’ as well. This is the highest level to which your mortgage rate can rise. So, if your mortgage had a cap of 5%, the rate would not go higher, even if the base rate does. Caps typically last between two and five years.
How Long are Tracker Mortgages Good for?
Most tracker mortgages are for two years, but there are deals available for three, five, and even ten years.
You will be transferred to your lender’s standard variable rate at the end of this period (SVR). Because the SVR may be higher than what you’ve been paying, it’s a good idea to consider remortgaging to a lower rate as soon as possible.
Lifetime trackers, as the name implies, are products that last the entire mortgage term, which is typically 25 years. Borrowers will benefit from not having to re-mortgage as frequently. However, one disadvantage is that the interest rate is frequently higher than in a shorter-term deal.
Advantages of Tracker Mortgage Rates
The primary advantage is that if interest rates decrease, so will your mortgage rate, lowering your monthly payments. Furthermore, some lenders may allow you to make overpayments up to a set amount without incurring any fees.
This implies that if your monthly payments drop, you can use the money saved to pay off your mortgage faster by overpaying it. If you’re planning on relocating or remortgaging in the near future, not having an early repayment charge gives you more options.
Drawbacks of Tracker Mortgage
The discouraging part is when interest rates rise, so will your tracker mortgage rate. Thus, making what was previously affordable become expensive. Therefore, when determining whether you can afford a mortgage, keep in mind that interest rates may climb in the future.
You can avoid this by choosing a tracker mortgage with a cap. That is a rate that is the highest you’ll ever pay. Also, keep an eye out for tracker mortgages with collars, which have a minimum interest rate that you must pay. This means that even if the base rate reduces, your monthly payments may not.
Mortgage Lifetime Tracker and How it Works
A lifetime tracker mortgage is a sort of variable rate loan that you take out for the duration of the loan. Like other tracker mortgages, it’s tied to a specific index, usually the Bank of England’s (BOE) base rate, so when it rises, your tracker rate climbs in lockstep. When the Bank of England lowers its interest rate, your tracker mortgage rates lower as well.
Your lifetime tracker mortgage interest rate, on the other hand, will not be the same as the central bank’s interest rate because it will normally be higher. It will, however, vary in lockstep with the base rate, and by the same amount.
This makes it a clear choice when it comes to understanding why your mortgage interest rate is altering. Your lender can adjust your standard variable rate (SVR) at any moment and by any amount if you’re on it. They are not required to provide you with a reason for doing so. You agree to a particular term with a lifetime tracker mortgage, and your interest rates will track the linked index for the duration of your loan. It’s possible that your deal will be the base rate plus 2%.
Assuming the linked index is the BOE base rate, which is 0.75 % at the time of writing, your mortgage interest repayment rate will jump from 2.75% to 3% if the rate rises by 0.25% to 1%.
Naturally, if the rate drops by 0.25%, your lifetime tracker mortgage interest rate drops by the same amount, from 2.75%to 2.50%.
The Difference Between Mortgage Tracker Lifetime and a Lifetime Mortgage
A lifetime tracker mortgage and a lifelong mortgage are not the same things
It’s also vital to understand the difference between a lifetime tracker mortgage and a lifetime mortgage. A lifetime tracker mortgage in the UK is one that you take out when you buy your house and repay over the life of the loan, or until you sell the property on which you took out the lifetime tracker mortgage.
Meanwhile, a lifetime mortgage allows you to borrow money against your home’s equity and repay it only after you die or go into a nursing facility.
For your home purchase, a lifetime tracker mortgage may be a good option. However, as with most mortgage products, it has its own set of benefits and drawbacks, and its acceptability will be determined by your specific circumstances.
Benefits
- As a result of the BOE’s rate determinations, the rate change is totally transparent.
- You won’t have to pay any additional mortgage arrangement fees for the duration of your loan.
- When interest rates decrease, your monthly payments decrease as well.
- There may be a limit to how high your lifetime tracker mortgage rate can go.
Demerits
- When the Bank of England raises interest rates, your monthly mortgage payments will climb for the same amount of time as the base rate.
- If interest rates climb faster than predicted, your mortgage could end up costing more than you anticipated.
- Since you don’t know how interest rates will change in ten years, you can’t budget for your exact monthly tracker mortgage payments over the long run.
- Lastly, your lifetime tracker mortgage rate may be constrained by a collar, or a rate below which it cannot fall.
Best Tracker Mortgage
It’s simple to use a comparison website to shop around for the best tracker mortgage to get an idea of available products and rates.
Another option is to contact a mortgage broker who will do the legwork for you. Many brokers do not charge the customer and instead take their commission from the lender.
As with all mortgages, it’s critical to account for all potential extra costs. An arrangement fee, for example, can cost up to £2,000 even if the loan has a low ‘headline’ interest rate. You may discover that a mortgage with a higher interest rate but a lower fee is less expensive. Before making any commitments, do your homework.
A good mortgage broker will walk you through the numbers. They also assist you in determining your affordability and matching you with lenders who are likely to accept your application.
Consider the following components when choosing the best tracker mortgage:
- Reasonable Fees from a Reliable Lender
- A Low Interest Rate and Mortgage Help for Free
- There will be no headaches
How Do You Pick the Best Tracker Mortgage for You?
Choose the reason you’re looking for a mortgage. Perhaps you’re a first-time buyer, remortgaging, or moving. Then enter the valuation of your home, the size of the mortgage you’ll need, and the terms you’re considering. All of the best tracker mortgages that are both appropriate and available to you will be displayed for you to choose from right away.
The crucial information you’ll need to know, such as interest rates, APRC, and arrangement costs, will be displayed. Plus an estimate of your monthly repayment based on the parameters you provided and the deals identified.
To make it easier to evaluate mortgages, the annual percentage rate of charge, or APRC, shows how much a tracker mortgage will cost you each year in interest rates as well as any other costs.
FAQ’s On Tracker Mortgage
When did banks cease making tracker mortgages available?
Banks stopped issuing low-cost mortgages linked to the European Central Bank’s (ECB) main rate — trackers – in 2008.
How much will I be compensated for my tracker mortgage?
The Central Bank of Ireland stated on July 13th that it expects AIB to pay clients who were also harmed by the tracker mortgage crisis. The bank estimates the average compensation will be around €6,000, for a total of around €6.6 million in compensation.
What's the difference between a variable and a tracker mortgage?
A variable rate mortgage will track the bank’s Standard Variable Rate, whilst a tracker mortgage will follow the BOE’s Rate.
Is it possible to pay a tracker mortgage off early?
Most lenders allow you to overpay 10% of your mortgage total each year if you have a fixed rate or tracker mortgage. But others may allow you to pay more, so check. If you pay more than necessary, you’ll be hit with a steep early payback penalty (ERC).
