Category: Mortgages

Mortgages

When is a Tracker Mortgage the Right Choice?

There are many different mortgages available and it can be confusing to know which one to choose. People will often look at the differences between a fixed rate and a variable mortgage as well as an interest only and repayment, but when the term tracker is thrown into the mix it can confuse things. A tracker mortgage will track the base rate and therefore when the rate changes the mortgage rate will change accordingly. This means that it is a variable rate mortgage and it can be an interest only or repayment.

The great advantage of a tracker mortgage is when the base rates go down. As soon as those rates are reduced your lender will need to reduce your mortgage rate as well. You will immediately benefit from the lower charges on your mortgage and this will either leave you with more money to repay your mortgage or more to spend, depending on how you have it set up. Obviously it can work the other way though and if the base rate goes up; your mortgage will immediately increase as well.

If rates are falling then those with tracker mortgages can be at a great advantage. Many lenders will not lower their rates immediately when the base rate falls and some will not lower their rates at all and so a tracker mortgage is immediately better where that is concerned. Although when rates rise, lenders may also not raise their rates and the tracker mortgage holders will be at a disadvantage. However, it is unlikely that a lender would not put their rate up when base rates increase; more likely that they would not reduce it when rates fall as they will make more profit this way.

The amount of difference an increase or reduction will make to the amount of interest you pay will partly depend on how much the rates change but also on how much your lender charges you in addition to the base rate. For a tracker mortgage your lender will charge you a certain percentage in addition to the base rate. If you pay 2% plus the base rate and the rate falls by a quarter of a percent it will not make such a significant difference, percentage wise, as it would if you were paying 0.5% plus the base rate. However, it will still make a difference and with a loan as big as a mortgage; even small differences count as they all add up in the long term.

Deciding whether to get a tracker is not an easy decision. You will not be able to predict what the interest rates might do over the term of your loan, which is likely to be 25 years. It is not even that easy to predict interest rates in the short term, let alone the long term. If you choose a variable rate, then it is likely to go up if interest rates rise, the same as a tracker, but it may not fall when rates fall or not as quickly or by as much. Often a fixed rate mortgage is seen as a safer bet because you will know exactly how much you will be paying for a certain term. This will not be the full term of the mortgage, usually up to five years. This can give security to those that are concerned about rises in interest rates that they may not be able to afford but also allow them to know exactly how much they will be paying over a certain time period. However, if interest rates fall while they are on a fixed rate, they will be paying a lot more than necessary, so it is wise to be cautious.

Choosing a mortgage is really a case of being able to predict interest rates. To protect yourself against steeply rising interest rates then a low fixed rate mortgage is the best but to take advantage of falling rates then a tracker can be the best. However, you also need to be aware of the costs of these mortgages compared to others on offer too. Plus it is not possible to predict interest rates and you can make guesses, but these are more difficult in the long term. Therefore, whatever decision you make it will always be a risk but make sure that it is a calculated risk by looking at the rates and economic situation and considering what may happen in the future. If you are not sure then talk to a financial advisor as they will be able to look at all mortgages available and show you the ones that will be the best with regards to what you want from a mortgage.

It is also worth remembering that you can remortgage. Therefore if you feel that your mortgage is not offering good value for money, then it is worth looking around at the alternatives. There are comparison sites these days for mortgages, so you can see whether there are any better deals out there and you can research different types of mortgages to see whether it could be worth swapping. You also could ask a financial advisor as to whether they think it would be a sensible idea for you to swap.