Tracker mortgages: the MoneyMagpie guide

Paul Prowse 25th Aug 2020 No Comments

Reading Time: 5 minutes

Tracker mortgage payments are directly linked to the Bank of England’s base rate. As their name implies, the rates of these mortgages can go up and down – depending on the market. With the base rate currently at an historic low of 0.5%, people with tracker mortgages have extremely low mortgage repayment rates at the moment.

Read on for the full MoneyMagpie guide to tracker mortgages. It will tell you what they are, whether they’re right for you, and how to get the best one.

WHAT IS A TRACKER MORTGAGE?

Tracker mortgages are directly linked to the base rate. Most set a percentage that is just above the base rate. So say it’s set at 1% above base rate, and the base rate is 1% – then your mortgage will be 2%. This is great when rates are going down but when rates rise, so will your repayments.

Unlike discount and capped rate mortgages, tracker mortgages are not linked to a mortgage lender’s Standard Variable Rate (SVR).

A SVR is the lender’s rate that is set above the base rate which the lender can change at any time. Although SVR based mortgages are also affected by the base rate, they are generally slower to follow in the event of the base rate being cut. Sometimes, when the bank of England reduces base rate, lenders do not cut their SVR (and therefore their discount rates) by the full amount. Some lenders set a minimum rate below which your interest rate will never drop, known as a collar, but there’s no limit to how high it can go.

When interest rates are low or falling, tracker mortgages can offer some of the cheapest deals around. However, if base rates rise, it makes it hard to judge what your monthly mortgage repayments will be.

WHO ARE THEY SUITED TO?

Tracker mortgages are good for borrowers who can afford to pay more if rates go up but believe that rates will go down. Such mortgages don’t offer the security of fixed-rate deals, where you know what rate you’ll be paying for years to come (which makes budgeting a lot easier!).

Check out the best tracker mortgage deals here through our independent mortgage comparison service.

THINGS TO WATCH OUT FOR

Before jumping into a tracker mortgage, there are some things to consider first.

The state of the market

It generally makes sense to avoid getting a tracker mortgage when the base rate is high or rising. But although interest rates are currently at an all-time low, tracker mortgages aren’t as popular as you might imagine at the moment. There are a number of reasons for this.

Firstly, people think that rates can’t get any lower and the only way is up. There’s some sense in this, as large government borrowing (as is happening during the current recession) tends to lead to interest rate rises in the longer term. Also, new tracker mortgages now track as much as 2.5% above the Bank of England base rate. Put simply, the tracker deals that are available today aren’t as competitive as they used to be.

Although fixed-rate mortgages offer you more security (you know exactly what you’re going to be paying throughout your mortgage), security shouldn’t come at too high a price. If you’re considering getting a fixed-rate mortgage, be sure to check out our guide to them here.

Arrangement fees

It costs money to set-up a mortgage, and most lending institutions are only too happy to charge you for it! Whether you’re a first-time buyer or re-mortgaging, the arrangement fee can sometimes break the £1,000 barrier. An increasing number of lenders are charging arrangement fees that are a percentage of the loan amount (say 1%) rather than a fixed fee, in order to get to the top of the ‘best buy’ tables. So if you want the best rate you pay a bigger fee.

As a general rule, the bigger your mortgage, the less important the fee is – because the interest rate is much more significant. So it might be worth paying the fee in order to get the cheap rate. If you have a small mortgage though, the size of the fee is important – as the money you’ll be charged from interest will be a lot less.

Early repayment charges

A mortgage is a massive debt, and we think that the sooner you get it cleared, the better. However, as far as the bank is concerned, they want you to keep your mortgage for as long as possible, so you keep paying them interest.

To try to limit how quickly you can pay off your mortgage, some tracker mortgages will have early repayment charges. These charges vary enormously by provider. They are sometimes calculated as a percentage of what you overpay (rather than being a flat fee). This means that the faster you try to repay your mortgage (i.e. the more financially responsible you are), the more they charge!

If a tracker mortgage seems to be a good deal but has high early repayment charges, think twice before signing up. One of the key benefits of tracker mortgages is that when rates are low or falling, they give you an opportunity to overpay your mortgage payments (without having to increase your expenditure). High early repayment charges nullify one of the main advantages to having a tracker mortgage in the first place, so be sure to read the small print.

Higher lending charges

If you have little or no deposit, there may be a higher lending charge (HLC). This is to cover the cost of insurance taken out by the lender in case you default on your mortgage payments, and there is any shortfall in what you owe the lender once your house has been sold.

An HLC is levied by some lenders when people are looking to take out a loan worth more than a certain percentage of the property (anything from 75% – 90% of the property’s value). Some sneaky mortgage providers may even only offer their headline interest rate on (for example) an 85% loan, while charging you at a premium should you require a higher loan-to-value.

The HLC is usually a percentage of the mortgage amount and could add up to a few thousand pounds – so avoid paying it if you can. Look out for a lender that doesn’t slap you with this charge, because it’s not common practice anymore.

Valuation and legal fees

If you are remortgaging, you may find that some lenders will offer free valuation and free legal fees. This could save you a few hundred pounds, so it’s worth considering.

Stamp duty, searches and conveyancing

Always bear in mind that there are far more costs to buying a house than just your mortgage. Stamp duty, land registry fees, surveys, conveyancing, broker fees if you use a broker… it’s a long list, so be sure to factor them into your budget!

HOW DO YOU GET A TRACKER MORTGAGE?

That’s easy. Just go to our mortgage comparison service and speak to the excellent mortgage advisers at L & C. Their mortgage advice service is fee free and they search the across the market to bring you the best deals.

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Tracker mortgages: the MoneyMagpie guide

WHAT IS A TRACKER MORTGAGE?

WHO ARE THEY SUITED TO?