“Having a mortgage broker arrange a tracker mortgage in the current climate may be a good solution to reducing your monthly payments each month” says CEO of LDN Finance, Anthony Rose.
In our latest article, we caught up with Anthony to understand what a tracker mortgage is, and why more and more clients are choosing tracker mortgages as a solution when remortgaging.
What is a tracker mortgage?
A tracker mortgage is a variable rate mortgage product that “tracks” the Bank of England’s (BoE) base rate.
What’s the difference between a tracker mortgage and a fixed rate mortgage?
A fixed rate mortgage has a set amount which clients pay monthly. This does not fluctuate. More often than not, fixed rate mortgages offer a competitive interest rate for a short term, for example two or five years. Once that comes to an end, clients can choose to remortgage on to another fixed rate mortgage or a variable one. However, in the current climate (Oct 2022) fixed rate mortgages are becoming increasingly expensive for clients as mortgage lenders increase their interest rates in line with inflation.
Fixed rate mortgages may offer clients a good value rate for a limited time. However, due to the set term, clients won’t have their mortgage payments reduced if interest payments drop, unlike tracker mortgages.
What is the difference between a tracker mortgage and a standard variable rate (SVR) mortgage?
The difference between a tracker and SVR mortgage is that a tracker mortgage has an interest rate that tracks the BoE base rate, whereas a SVR mortgage has an interest rate set by the mortgage lender.
Both types of mortgages may see your mortgage payments change each month. This can make it difficult to commit to a set value of monthly outgoings.
How do tracker mortgages work?
Tracker mortgages “track” the BoE’s base rate. Therefore, if interest rates fall you’ll make lower payments to your mortgage lender however if interest rates rise, your payments will increase. For some clients, this uncertainty may cause difficulties for them with monthly budget planning.
Tracker mortgage interest rates
As tracker mortgage rates follow the Bank of England base rate, the final interest rate provided by a lender is set slightly above that. They will not match the BoE rate exactly.
How long will a tracker mortgage last for?
Tracker mortgages can be offered for an introductory period, usually between one to five years. Alternatively, you can get a lifetime tracker which will last for as long as your mortgage.
If you get a tracker mortgage for a limited time, when it comes to an end, you’ll usually be moved to the lender’s standard variable rate so it’s important for clients to take control of their finances and be conscious of remortgaging when you are able to explore new options.
Speaking to a mortgage broker will help you to not only source the most suitable solution for your circumstances, but they’ll explore the whole-of-market options available – even getting access to products that may not be available if you were to go direct!
What is a collar rate? How low can my tracker mortgage payments go?
Mortgage lenders have started to introduce a ‘collar rate’ on their tracker mortgages which means that your rate can not drop below a certain minimal level. The reason for this is that if interest rates drop dramatically, your monthly mortgage payments won’t suddenly decrease as well.
What are the advantages of a tracker mortgage?
Here are some advantages surrounding tracker mortgages:
- If the BoE interest rates drop, so will your repayments
- Often, tracker mortgages offer switching to a new product without charging you a fee
- Introductory rates can be more competitive than fixed rates, especially during times of inflation
- Early Repayment Charges (ERCs) can be more affordable when compared to other types of mortgage. Sometimes, tracker mortgages may not even have them.
What are the disadvantages of a tracker mortgage?
Here are some disadvantages of tracker mortgages:
- If the BoE base rate goes up, so will your monthly mortgage payments
- Collar rates mean that your minimum payments will be capped.
- If you remortgage during the introductory period, or you want to repay your mortgage in full, you may incur a charge.
With advantages and disadvantages available, tracker mortgages offer clients a more flexible solution to monthly repayments. Especially when compare against fixed rate mortgages.
To discuss your current situation with one of our expert advisers, get in touch today or call +44(0)20 3903 9875 when our friendly team are on hand to help.