A guide to tracker mortgages
Tuesday, 15 February 2011 01:06
By Kate Saines
If you are currently on a tracker mortgage, it's likely you are feeling a little uneasy at the moment.
Last Thursday's announcement the Bank of England was to maintain the Base Rate at its low of 0.5 per cent for yet another month will have given many tracker borrowers a brief respite from their anxiety.
But if the experts are to be believed, it is only a matter of time before the increase we have all been waiting for is set in motion and with today’s (15th Feb) news that inflation for January reached four per cent this increase could be sooner than expected.
So does this mean the end of the road for tracker mortgages?
Should we all move to fixed rates to shelter ourselves from more increases?
We’ve gathered together the views of two mortgage experts to find out more about the tracker mortgage and whether it’s still a viable option for borrowers.
What is a tracker mortgage?
A tracker mortgage is a home loan where the interest rate alters at the same rate as the Bank of England base rate.
Lenders providing tracker mortgages will ask for a basic rate of interest to be paid back plus the current base rate.
If you were on a tracker deal offering Base Rate plus two per cent, you’d be paying 2.5 per cent at the moment.
If the Bank of England raised its rate to one per cent, the interest rate on your mortgage would increase at the same rate, meaning you’d pay three per cent.
Who do tracker mortgages suit?
If you are gambling man or woman, a tracker will be right up your street. This is because trackers are considered the more risky option in the mortgage market.
When you take out a mortgage with a fixed rate of interest, you know exactly what you’ll be paying for the duration of that mortgage.
With a tracker, you cannot predict what you might be paying in a year’s time.
But, as with all risks, the advantages can be great. If you took out a two-year tracker deal when the Bank of England first dropped its rate to 0.5 per cent, you’ll have enjoyed rock-bottom interest for almost two years.
However, the opposite also applies. If rates were to soar to five per cent over the next two years you’d be shelling out more interest than Bob and Sheila next door who are on one of the most expensive fixed-rate deals.
Brian Murphy, head of lending at the Mortgage Advice Bureau said: “Tracker mortgages are typically less attractive to those people with little room to manoeuvre.
“Borrowers on tight budgets who cannot afford the element of risk that comes with this type of mortgage have traditionally erred towards fixed rates.”
They are not particularly ideal for new homebuyers either.
Neil Baker an IFA for Protection and Investment Ltd, said he would very rarely recommend a tracker to a first-time buyer.
"They are entering into an arrangement they have never gone into before. If they go on a fixed rate it's easier to budget," he explained. "Trackers are better for those coming off a fixed rate."
Popularity today
With experts predicting an imminent rise in the Base Rate, trackers are becoming increasingly unpopular.
Mr Murphy said in January 2011 only 25 per cent of borrowers took out variable rate mortgages, while 31 per cent chose variable remortgage products.
“Compare that to this time last year,” he said, “when 55 per cent of borrowers chose variable over fixed mortgages, and 52 per cent of remortgages were variable, and you’ll see how the mortgage landscape has changed.
Mr Baker said he had also noticed a shift away from trackers in terms of their uptake.
Find out more: The best types of mortgages for different buyers
Outlook for tracker mortgages
So what's the future for tracker mortgages? Sadly, there is no straight answer to this. We all know interest rates will go up at some point, and when they do so will tracker rates.
The question is when will they go up, and at what pace?
Brian Murphy said the threat of a rate rise in the foreseeable future meant variable rate mortgages were becoming increasingly unpopular. "Anyone nearing the end of a tracker deal might be more comfortable considering a fixed-rate deal."
However, Neil Baker thinks there remains strong value in tracker mortgages because there is still a good 'spread' between the trackers and the fixed-rate deals.
In other words, the best tracker rates are still better value than the best fixed rate mortgages.
What's more, he thinks it will be a little while – perhaps six months – before interest rates go up and even then they will not rise dramatically.
"The mortgage market is still very difficult, no one really knows what's going to happen. But economists think the base rate will stay low for the rest of the year.
"So 18-month to one-year trackers are still good value."
And he believes tracker deals will always be available for borrowers who want them, even in the longer-term future.
He added: "A lot of lenders came out of the market during the credit crunch which meant there was not as much choice.
"There are now six or seven main lenders and they are pretty competitive so going forward the options will always be there."
Top tracker products
If you are still keen on tracker mortgages, what are your options?
Mr Murphy said: “In terms of products currently on the market, both the Woolwich and Nationwide are currently offering tracker mortgages linked to the BBR and with a good headline rate and the option to switch to a fixed rate without an exit penalty.”
Mr Baker recommends 18-month or one-year tracker mortgages. He said Santander and Nat West tend to provide pretty good deals.
However, he suggests borrowers go directly to the lender to get the very best deals.
Use the Myyfinances.co.uk comparison site to find the best deal on a mortgage.
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