In the British mortgage world, there are many different ways of getting finance on a property and many different ways of paying this money back to the lender. Sometimes the difference between each type of mortgage can be confusing, that’s where advice and guidance from a mortgage professional always comes in handy. In this article we will talk you through the ins and out of one of these types of mortgages. A tracker mortgage.
Tracker Mortgage vs Fixed Rate Mortgage?
So, what’s the difference between a fixed vs tracker mortgage? We have already gone through the specifics of a fixed rate mortgage in a previous article. For anyone who doesn’t know, in brief, a fixed rate mortgage is the most common type of mortgage that people choose in the UK. Essentially, you fix your mortgage rate in place for a period of 2 – 5 years (in some circumstances up to 10 years) so that your rate won’t increase or decrease for that period.
After your fixed rate period ends, most people look to remortgage their property on to another fixed rate product. If you use a mortgage advisor to help with your mortgage, they will keep track of your fixed rate and will contact you well before its due to expire to make sure you get the best deal at the right time. Fixing your mortgage for a few years can give you comfort and certainty that your monthly payments will remain manageable and won’t be affected by any economic changes.
How Does A Tracker Mortgage Work?
With tracker mortgages, things are very different. A tracker mortgage, sometimes referred to as a base rate tracker mortgage, is not fixed. In fact, it’s almost exactly the opposite, it’s very mobile. A tracker mortgage does not have a specific rate and normally tracks the bank of England’s base rate. The certainty and safety net you arguably get with a fixed rate mortgage does not necessarily come with a tracker mortgage meaning, you are never completely sure of what your rate will be. Let’s have a look at tracker mortgages in more detail.
Rate Tracker Explained
As already mentioned, tracker rates tend to track the Bank of England base rate however, they don’t completely match the base rate. They are normally a percentage above the rate for example, currently the base rate is at 1% and rising fast. A tracker mortgage could be 2% above the base rate making your payable rate 3%. Tracker mortgages can be for an introductory period (typically anything from one year to five years), or you can get a lifetime tracker mortgage, which means that you’ll be on the variable tracker the whole term of your mortgage. Lifetime tracker mortgage rates really vary depending on the lender and the circumstances, so you should always consult a mortgage advisor before choosing one.
If you’re on an introductory tracker rate, your mortgage will usually go onto a standard variable rate (SVR) or another tracker rate (with a higher margin) at the end of the initial term. The introduction period you secure a tracker mortgage for normally has quite a low rate, but if you are taking a longer-term tracker mortgage the initial rate is normally higher. For example, a lifetime tracker could be 4 – 5% above the base rate.
What Is A Lifetime Tracker Mortgage?
Simple, really. A lifetime tracker mortgage is a tracker mortgage that will last the entire lifetime of your mortgage. This is different to a normal tracker mortgage as when your 2 – 5-year introductory period ends you will most likely go on to a standard variable rate but with a lifetime tracker mortgage this does not happen, and you just continue tracking the base rate.
Some people may prefer this option because, although the rate above the base rate is normally higher than a standard tracker, there is a consistency that you know your starting rate will remain the same. All you need to monitor is the bank of England base rate for the entirety of your mortgage. If you are on a shorter-term tracker and you go on to the standard variable rate after your introductory period, this can be changed at any time by the lender. Everyone’s circumstances are different so this might be the best option for you, but only a specialist advisor can help you to choose the best option.
Who Offers Tracker Mortgages And What Are The Best Tracker Mortgage Rates?
When it comes to tracker mortgages, ‘Best rates’ is a very interesting term, because it really depends on the type of mortgage you are looking to get and your plan for the future. As we have already explained, rate tracker mortgage loans can fluctuate greatly. Currently you can get a Barclays tracker mortgage, a NatWest tracker mortgage, a Halifax tracker mortgage, Santander tracker mortgage, Nationwide tracker mortgage, HSBC tracker mortgage, First Direct tracker mortgage, TSB tracker mortgage…. you get the idea. Pretty much all the main high-street banks offer tracker mortgages, so they are by no means uncommon although some of the smaller banks and building societies do not offer.
Current Tracker Mortgage Rates
As with all other types of mortgages, the above banks each have their own criteria and interest rates for their tracker rate mortgages and if you do decide to go down this route with an advisor, they will help you to decide on and secure the best tracker mortgage or best lifetime tracker mortgage out of the bunch. At this moment in time, some of the best tracker rate mortgages are with Barclays who offer Barclay flexible tracker mortgages as low as 0.14% above the Bank of England base rate. Barclays lifetime tracker mortgage rates no longer exist. After a fall in demand, Barclays stopped offering lifetime tracker rate products in 2014.
There are still plenty of lenders who do offer lifetime tracker mortgages at competitive rates, however, this could change as rates naturally do with mortgage lenders. Barclays also offer offset tracker mortgage rates currently of 1.22% above the bank’s base rate. Advice on Barclay flexible tracker mortgage products and getting the best tracker mortgage rate can be found by speaking with one of our brokers. NatWest tracker mortgages currently start at 0.39% above the base rate. Nationwide tracker mortgage rate guides show that currently their best tracker mortgage deals start at 0.29% above the bank’s base rate. If you are looking to get the best tracker mortgage rates, UK mortgage brokers Oportfolio can help you today.
Should I Get A Tracker Mortgage? The Positives And Negatives
When it comes to getting the best tracker mortgages, the question you should be asking isn’t necessarily “What’s the cheapest tracker mortgage?”. Although making sure you get the best deal possible is a priority, you should be more concerned about making yourself as secure and as stable in your mortgage as possible. Because, as we already know, a tracker can change at the drop of a hat from the bank of England. Getting the right lender and product and having a thought-out plan of action from your advisor is priceless.
Let’s take a look at some of the pros and cons of tracker mortgages:
Fixed or Tracker Mortgage?
- If interest rates or the base rate goes down so will your payments.
Although it seems unlikely as the base rate is the highest it’s been in 13 years, when the base rate drops down your mortgage payments will also decrease as you pay based on the base rate + a percentage above the base rate.
- Introductory tracker rates can be among the lowest variable interest rates available.
As we’ve already mentioned, getting an introductory tracker rate mortgage can be a very low rate of pay compared to a lifetime tracker which is usually quite high in comparison.
- Arrangement fees for tracker mortgages tend to be lower than for fixed rate mortgages.
- Early repayment charges can be less expensive for tracker mortgages in compared to fixed rates.
ERCs usually range from £50 to £300 for tracker mortgages whereas other fixed rate products can charge £1,000+.
- Some mortgage lenders offer a ‘switch & fix’ feature, which means you can change to one of their fixed mortgages if rates go up, without paying an early repayment charge.
Goes without saying that this is always a good thing to have in your back pocket in case you change your mind and want to switch to a fixed product in the future.
- If the tracker has a ‘collar rate’ you won’t benefit if rates fall below a certain level.
An Interest Rate Collar effectively creates a band within which the borrower’s variable interest rate will fluctuate essentially stopping your rate from fluctuating too much. If your product has this collar and the rate drops by a lot, you may be restricted by the collar and not benefit from the low rate.
- If interest rates go up your payments will go up too.
Everyone knows this is the main risk. If the rate that you are tracking goes through the roof, you will inevitably pay more per month for your mortgage. Things like collar rates can be introduced to mitigate this but, most lenders don’t offer this so your payments may really fluctuate.
- When the introductory rate period ends you go onto another (usually higher) tracker rate or your lender’s SVR. This means that your payments could go up. However, you can remortgage with a different provider or arrange a new mortgage deal with your current lender when this happens.
- You literally have no idea when your rate could change.
Because the rate is affected by third party economic factors, there is no way of being able to predict what your rate could be day to day unless you are psychic.
What Is The Appeal Of Getting A Cheap Tracker Mortgage?
Historically, the most appealing and most common reason that someone might get a tracker mortgage rather than a fixed rate mortgage is that your rate could be lower than the one offered by the bank. Huge emphasis on the word ‘could’. For people who were really concerned about high bank interest rates in the past, choosing a cheap tracker mortgage product while the base rate was low often seemed like a worthwhile gamble. In 2009, tracker mortgages accounted for a whopping 7 out of 10 mortgages!
You could have potentially stayed on a relatively low mortgage repayment scheme for several years while your friend on a fixed rate might have been stuck paying a rate of 4% for 5 years. So there was definitely an argument for some people in certain circumstances to choose a tracker mortgage over a fixed product. The more free flowing and flexible terms of a tracker mortgage also made it easier for clients to change elements of the mortgage and re-structure when needed.
Buy To Let Tracker Mortgage
We’ve spoken a lot about residential tracker mortgage rates, uk lenders who offer the best residential tracker products, and the pros and cons of trackers. However, we haven’t actually spoken about buy to let tracker mortgages. Yes, it is possible for a landlord to have a tracker mortgage on their rental property. But, not all lenders will offer a buy to let tracker mortgage, Nationwide, Santander, Halifax tracker mortgage rates and HSBC tracker mortgage rate products are all reserved specifically for residential mortgage loans.
Lenders such as Barclays and TSB among other lenders will allow buy to let investors to choose tracker rate mortgages. The pros of this being that a landlord can make a nice profit on their monthly rental income if the base rate is low. However if the base rate is high, like it currently is, the profit margins of the rental income receive become smaller and smaller and landlords could be forced to increase their rent just to make ends meet.
TSB tracker mortgage rates for new buyers and home movers start at 0.69% above the Bank of England’s base rate and go all the way up to 0.99% above the base rate giving a payable rate of up to 5.49% currently.
Working With A Mortgage Specialist
Working with a mortgage advisor to help you with your new mortgage is honestly the best thing you can do for yourself. I know that we have a bias but when it comes to complicated mortgages you really don’t want to go it alone. Every day we hear horror stories of how clients have tried to organise a mortgage themselves or have been direct to their bank because the thought it was the easiest option. Unfortunately, a lot of people don’t know what exactly they need or their banks are limited to what they can offer and they end up getting themselves into such a mess that they end up either losing a property they wanted to buy or they end up with a mortgage deal that’s not particularly beneficial.
Jade Pinkerton, senior mortgage and protection advisor at Oportfolio mortgages in Putney, London gives her thoughts on tracker rate mortgages:
“TIMES ARE CHANGING… Tracker rates are becoming extremely popular.
So much so, that Santander have reviewed their options, for this to be more in line other lenders and with customer demands. Normally, fixed rate mortgages are by far the most popular option for clients. They want peace of mind that their payments are not going to change, and it allows people to budget effectively. Whereas tracker rates are variable, and security of the rate is not guaranteed.
However, lender fixed rates are now priced higher than people are hoping for or higher than they have been used to over the last few years. The tracker rates are substantially lower at the moment, so people are now considering them above fixed products. But as we have already mentioned, tracker rates can rise over time, so may not be cost effective overall. Should rates continue to rise as they have done, this would lead to quite high mortgage rates for some clients… that’s why we can’t stress enough how important it is to get advice on rates.
For clients wanting to consider tracker rates, it is also critical to protect yourself against rate rises (where possible), especially in this current economic climate. Our advice, for these clients is to make sure they consider the ERCs (early repayment charges) associated with these options. It can be possible to get a tracker rate with low or even zero ERCs, so if rates rise higher than hoped, the borrower can review their mortgage, change product change lender, change loan size etc – WITHOUT HAVING TO PAY A PENALTY FEE TO GET OUT OF THE CURRENT MORTGAGE.
Santander have historically been quite well known for having high ERCs – which can trap borrowers into their options. But they have now amended this to be a little more in line with what advisers are recommending and customers want/need. They now have reduced their ERCs and have a sliding scale that reduces over time – which is what other lenders have. Although these changes are positive, it is important to get independent advice specific to your needs and preferences.”
Where Do I Start?
With any kind of mortgage, you always need to start with the basics. The best way to do this is to get in contact with a mortgage professional like Oportfolio to go through a free mortgage assessment. By giving a mortgage advisor a call, you will be able to get a free breakdown and assessment of your income and outgoings so that you know exactly what you can and can’t do and what your best options are.
Once your mortgage has been assessed and your advisor has made sure that everything is doable, they will start things off officially by asking for some documents from you. Normally if you are employed, they will need 3 months pay slips and 3 months bank statements, copies of your passport or driving licence and depending on the situation, your proof of deposit.
If you are self-employed, things are a little different. If you are a sole-trader or contract worker the lender will need your last two years tax overviews and tax calculations. If you are a share holding limited company director, they will need two years finalised company accounts from your accountant.
When all of your documents are in, your advisor will check through them and if everything is in order, they will officially submit your mortgage application for you. The administration team will then carefully monitor your application from start to finish and provide the lender with anything else they might request along the way.
With luck, your mortgage application should go through very smoothly and will normally be offered within a couple of weeks however your advisor and administration team will keep you updated every step of the way. And that’s it!
If you or anyone else you know is thinking of getting a new mortgage, whether it’s a fixed or tracker mortgage, please feel free to contact our mortgage team today for a free initial conversation.