Why term trackers are a no-brainer for mortgage borrowers!
Filed under: Mortgages
After all, by going for one of these low rate homeloans you could save thousands on your mortgage costs over the next few years compared to a fixed rate deal, and possibly keep saving for even longer.
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A tracker rate mortgage literally tracks the Bank of England Base Rate at a set margin, so your pay rate mirrors its movement.
For example, if you have a tracker that is set at Base Rate plus 2.49%, you will currently pay 2.99% because the Base Rate is 0.5%. If the Bank of England was to increase it by 0.5% to 1% your pay rate will automatically rise by 0.5% to 3.49% (usually within a month). By the same token your pay rate also tracks cuts in the Base Rate so it has the potential to fall as well as rise.
Most trackers are available as a 2-year deals that then revert to either the lender's standard variable rate or a less attractive tracker rate – in other words you end up on a more expensive longer term rate.
However a term tracker lasts for the entire duration of your mortgage, so the conditions under which you take out your deal remain in place until you repay your homeloan. Some deals are even portable so you can take it with you if you move house.
What are the benefits?
1. The first and most obvious benefit of a term tracker is that it is cheap compared to a fixed rate mortgage. Hugh Wade-Jones, director of mortgage brokerage Enness Private Clients, says: "With the recent raft of fixed rate mortgage rises, trackers certainly look appealing. Rates are likely to be a couple of percentage points higher than the Bank Base Rate, but that is at an historically low level."
The average term tracker is 3.95% while the average two-year fixed rate is 4.69%, according to financial information provider Moneyfacts.
On a typical £150,000 25-year repayment mortgage this means that the average term tracker would cost £788 a month, £62 less than the average two-year fix at £850. That's a saving of £1,488 over the first two years alone.
2. A term tracker has the potential to offer you low monthly repayments for a very long time. If interest rates remain low, as they are expected to, a term tracker could prove the cheapest type of mortgage.
This is because both two-year trackers and two-year fixed rates revert to a higher interest rate after the initial deal period, at which point you will have to either accept the higher repayments or switch to another deal. And there is no guarantee that the mortgage deals available in two years' time will be anything like as competitive as those on offer today.
3. If you stick with your term tracker you will avoid the switching fees that you would face if you flitted from one short-term deal to the next.
With this week's announcement from Moneyfacts that average mortgage fees have now topped the £1,500 mark this represents a significant saving. If you keep your term tracker for just five years you could potentially save over £3,000 in arrangement fees compared to those who move between two-year deals.
4. Trackers are completely transparent and your lender cannot simply decide to hike your mortgage rate at any point. It can only move a tracker rate upwards as a response to a Base Rate increase.
Many borrowers prefer this clarity over other types of variable rates, like discounted, capped or standard variable rates, which can be hiked at the lender's discretion.
5. Finally, term trackers usually only tie you in for the first two or three years, or not at all, after which you are free to move to another mortgage if you want to. So the Early Repayment Charges on these deals are no more onerous than on short-term trackers or fixes, but the potential to save for longer is greater.
With so many benefits, term trackers sound like a no-brainer, but are there any drawbacks?
The obvious downside to these mortgages is the potential for your interest rate to rise if the Bank of England increases its Base Rate. And there is no limit as to high how it could go, so it is essential you are comfortable with this risk if you are considering a tracker.
However, experts expect Base Rate to remain low while the economy is struggling to grow, and this looks likely to remain the case for some time.
The consensus of economists is that we could now see the first rise coming as late as 2016, with some predicting rates could even fall this year – and remember they are already at an all-time low.
A combination of the ongoing Eurozone woes, the latest Bank of England lending boost, and this month's fall in inflation could mean rates stay low for much longer than was forecast at the start of 2012.
This makes variable rate mortgages, like trackers, much more appealing to borrowers. But there are no guarantees and if it is important for you to know exactly what your future mortgage repayments will be, the only way you can achieve this is by fixing your rate.
Wade-Jones says: "Borrowers should be aware that no matter what the climate, trackers will always represent something of a gamble as they are always susceptible to future rises. Anyone taking out a tracker mortgage should ensure they have a financial cushion to protect themselves should interest rates rise and to guarantee that they could afford increased repayments."
Term trackers have a lot going for them in terms of immediate cost, flexibility and the potential to offer a long-term low rate. If you are comfortable with the possibility of rising rates, and have the means to cover the resulting higher mortgage payments, these deals are definitely worth taking a closer look at.