Tracker Mortgage Rates
Did you know that as of June 2023 18% of all mortgages across England and Scotland were on variable and/or tracker rate mortgages?
That's quite a chunk of the market. You're likely wondering why they're so popular and what benefits they could possibly offer to homeowners like you.
These types of mortgages are distinct in that their interest rates 'track' the Bank of England's base rate. When it rises or falls, so does your mortgage rate. But is it as simple as it sounds and more importantly, is it beneficial for you in the long run?
What is a tracker mortgage
A tracker mortgage is a type of home loan where your interest rate tracks, or follows, a specific benchmark, typically the Bank of England Base Rate. This means you're not locked into a fixed interest rate, but rather, your rate will increase or decrease in line with the base rate.
Now, you're probably wondering, how does it affect you? It's all about risk and reward. If the base rate falls, so does your interest, and your monthly payments can go down. Sounds great, right? But if the base rate rises, so does your interest, and you'll be paying more each month. That's the risk you're taking.
Additionally, tracker mortgages often come with a 'collar', meaning there's a minimum rate you'll pay, even if the base rate drops to zero or below. So, you're not going to get something for nothing.
Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.
What is a collar on a tracker mortgage?
In the world of tracker mortgages, you'll often come across the term 'mortgage collar', which essentially acts as a safety net for your lender. This collar is a minimum interest rate set by the lender. Even if the base rate drops to a level below this collar, your mortgage rate won't go any lower. It's a form of protection for the lender, ensuring they'll always receive a certain level of interest.
Let's say your tracker mortgage rate is set at 1% above the base rate and the base rate drops to 0.5%. Without a collar, your mortgage rate would drop to 1.5%. However, if your lender has set a collar of 2%, your mortgage rate won't drop below this, regardless of how low the base rate goes.
It's important to be aware of any collar on your mortgage as it could impact the potential savings you might make from a falling base rate. So, always check the fine print before agreeing to a tracker mortgage. Remember, while a collar protects the lender, it might limit your benefits in a low-interest-rate environment.
Can I overpay a tracker mortgage?
When you're considering a tracker mortgage, you might wonder if you're allowed to overpay. The good news is, yes, you can. Overpaying is a strategy you can use to reduce your total interest cost and shorten the life of your loan.
In most cases, lenders in the UK do allow overpayments on tracker mortgages. However, there's usually a limit to how much you can overpay without incurring an early repayment charge. This is typically 10% of the outstanding mortgage balance per year, but it can vary from lender to lender with some lenders allowing you to repay any amount, at any point, with no early repayment charges. It's therefore essential to check the terms and conditions of your mortgage agreement before making overpayments.
Best tracker mortgage rates
Having considered the possibility of overpayments, let's now explore how to find the best tracker mortgage rates in the UK.
It's essential you conduct thorough research and compare rates across lenders to secure the best deal.
You can start by visiting comparison websites. They'll provide you with a broad overview of the current rates on offer. However, don't just rely on these sites. It's also worth speaking to a mortgage broker, who'll have access to deals that aren't available directly from the high street.
When comparing rates, don't forget to look at the overall cost of the mortgage. A low tracker rate may seem appealing, but it could come with high fees or penalties for overpayments. Make sure you're aware of all the associated costs before making a decision.
Pros and cons of a tracker mortgage
Now, let's delve into the pros and cons of a tracker mortgage to help you decide if it's the right choice for you.
On the plus side, a tracker mortgage alludes to transparency. It tracks the Bank of England's base rate, so you'll always know how your rate is determined. When the base rate is low, your payments will be too, potentially saving you a fair bit of money. Additionally, there's occasionally no early repayment charge, which gives you the flexibility to overpay or switch without penalty.
However, it's not all rosy. The main drawback is uncertainty. If the base rate rises, so does your mortgage payment. This can make budgeting tricky, especially if you're stretched thin. Also, some tracker mortgages come with a 'collar', meaning the rate won't fall below a certain level, limiting your savings potential.
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