What is the best choice? A lifetime tracker or a tracker mortgage
Thursday, 17 November 2011 03:13
By Kate Saines
For 32 consecutive months interest rates have been wallowing at their 0.5 per cent low. Which might beg the question – if it hasn’t already – should I switch to a lifetime tracker mortgage?
If interest rates are set to remain at this low for some time, even if they adjust upwards gradually, you could be taking a prudent financial step if you opt for the lifetime tracker.
Because last week, Ray Boulger of independent mortgage adviser John Charcol, suggested the impact of the crisis in the Eurozone on the UK could make lifetime trackers a more realistic option for many homebuyers.
He explained, where mortgages are concerned, the key message was for people to think long term.
“The banking crisis will get worse as the Euro contagion spreads and this will inevitably have a significant impact on non-Eurozone banks such as those in the UK as well,” he explained.
“One likely impact on our interest rates is the Bank Rate will remain at 0.5 per cent even longer than looked likely as recently as a month ago. It is no longer unreasonable to think of Base Rate remaining at 0.5 per cent until 2014.
“This suggests either buying a lifetime tracker, where the price is generally only 0.25 per cent – 0.5 per cent higher than for a two-year tracker - or a reasonably long-term fixed rate, say for five years.”
Of course, there’s always the risk a fast and dramatic rise in interest rates might occur which could see you trapped in a high-rate mortgage if you’ve taken out a lifetime tracker.
Does this make a shorter tracker a more sensible option?
We’ve explained the differences between lifetime trackers and traditional tracker mortgages to give you both sides of the tracker story.
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The lowdown on Tracker Mortgages
What are they?
A traditional tracker mortgage is a loan with an interest rate which runs in line with the Bank of England base rate.
Borrowers pay a basic rate, of say 2.5 per cent, plus Base Rate (BR). With the interest rate at 0.5 per cent at the moment tracker mortgages are quite competitive. If you were offered a mortgage rate of 2.5 per cent plus BR you would currently be paying three per cent interest each month.
These rates are usually offered for a set period of time – usually between two and five years. After this the deal will expire.
What are the disadvantages?
Trackers are considered to be more risky mortgages when compared to fixed-rate deals because you simply cannot predict accurately what will happen to interest rates.
Just because they are at 0.5 per cent when you take out a two-year tracker, there’s no firm guarantee they will remain at this level after a year or two at this time and in normal economic times that interest rates might change even more dramatically.
You are essentially taking a gamble. And often the consistent, dependable – albeit slightly higher –rates on offer with fixed-rate mortgages are more suitable particularly to anyone on a tight budget, including first-time buyers.
At the end of the tracker term your interest rate will revert to the lender’s standard variable rate (SVR). This is usually higher than the Bank of England base rate, so you will then start paying more interest.
They are also less flexible than lifetime trackers in terms of overpayments and Early Repayment Charges (ERC). You’ll often be penalised if you want to overpay more than a certain amount or pay off the loan.
What are the advantages?
When the base rate is low – as it is now – tracker rates look attractive. The top tracker mortgage rates on the market at the moment are between 1.95 per cent and 2.39 per cent.
Santander’s two-year Tracker mortgage is currently offering a rate of 1.45 per cent plus base rate, giving a grand total of 1.95 per cent interest. Meanwhile the top fixed-rate mortgages are coming in at between 2.29 per cent and 2.84 per cent.
What’s more, with these traditional trackers, you need only sign up for a set period of time – most trackers run for between two to five years. So if interest rates start rising you are not locked in for the long term.
Find out more: A guide to guarantor mortgages
The lowdown on Lifetime Tracker Mortgages
What are they?
They are mortgages which track the Bank of England base rate, just like traditional trackers. You’ll be offered a standard rate, such as 2.5 per cent, plus BR.
However, the difference is when you borrow using a lifetime tracker you must pay this rate for the duration of your mortgage.
So, if you take out a lifetime tracker today with a rate of 2.5 per cent plus BR, which is currently at 0.5 per cent, you’ll pay three per cent interest on your mortgage.
But if the Bank of England increases the base rate to one per cent during the term of your mortgage, you’ll start paying 3.5 per cent. If rates go up to five per cent before you’ve paid off your loan, you could find yourself on a rate of 7.5 per cent.
What are the disadvantages?
Taking out a lifetime tracker means you are taking an even bigger gamble than with the traditional trackers because you are locked in for a longer period and therefore more open to the effects of interest rate rises.
What are the advantages?
The other side of the coin is you are also open to any interest rate cuts which may occur. And by opting for a lifetime tracker you are reassured your rate will track the Bank of England’s Base Rate, as opposed to the lenders’ SVR, which is often higher.
Lifetime trackers also tend to be more flexible. Lenders will allow borrowers to make much larger overpayments than with other types of mortgage, and ERCs usually only apply for the first two years of the mortgage, if at all.
This kind of flexibility makes lifetime trackers ideal for people who earn annual bonuses and therefore have a big lump sum of cash they can use to repay a large chunk of their mortgage at irregular times.
This also means the mortgages can be paid off earlier so the ‘lifetime’ element will not necessarily mean the 25 years expected on other mortgages.
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