Tracker Mortgages need planning

Tracker Mortgages need planning

Tracker Mortgages are defined as deals provided by lenders with an interest rate portion higher or lower than the Nation’s Central bank’s Base rate. The base rate is the interest rate at which high street banks borrow money. The central bank determines the base rate and they update it every month. The base rate has reduced significantly due to the pandemic. The pandemic has had a direct impact on the mortgage industry and Tracker mortgages. In simple words, tracker rates have come down along with the reduction of the base rate.

Tracker Mortgages: How it works?

Tracker mortgages are available for first-time buyers, refinancing customers, BTL mortgages holders excluding owners of property bought via a limited company. Your mortgage will be charged at an interest rate portion plus or minus the base rate. For example, when your mortgage is set at a base rate plus 1.8% and the current base rate is at 0.5%, your effective interest rate will be 2.3%.

Tracker Mortgage VS Fixed deals

Tracker mortgage interest rate changes each month whereas fixed allows you to maintain a fixed monthly payment. Trackers are subject to the base rate. This has made the trackers highly volatile. It is subject to economic situation, property market/valuations, and government policy on lending to banks. It is true that the base rate has come down recently, however, there is a good chance of the rate going up in the coming months.

So, it is important that if you are moving into a tracker mortgage you should be able to afford the high monthly payments as well. It means you need more budget planning with tracker mortgages. A fin-tech mortgage broker can help you plan effectively on this. Mortgage protection insurance can also be another solution to overcome any risk of unaffordable circumstances. On the other hand, fixed mortgages give you the chance to know what is your largest direct debit is in advance and plan accordingly.

Tracker Mortgages VS Variable Mortgage

Variable mortgages are totally up to the lender to set the interest rate. Well, borrowers do not want to be in this scenario as a lot of lenders place standard variable rates (SVR) relatively higher compared to their fixed deal products. They also can change the rate at any time. So, how does a tracker mortgage differs from a variable mortgage?

With tracker mortgages you are tied to an external rate. It is always going to be a base rate plus a fixed rate. The only variable component is the base rate. This has changed only thrice since 2016! This makes the tracker mortgages cheaper than variable rates. On top of these differences, there is an important similarity between a tracker deal and a variable rate mortgage.

No Early Repayment Charge!

Usually, both tracker mortgages and variable mortgages do not have an early repayment charge! If someone wants to make an overpayment towards the mortgage or redeem the mortgage in full, Tracker deals do not charge any early repayment penalty. On the other hand, fixed deals have significant ERCs such as 3%, 2%, or 1% of the loan amount. This can be highlighted as one huge benefit of tracker mortgages.

For someone who is planning to let out the current property and buy a new residential property in like 6 months from the start of the mortgage, a tracker mortgage is the ideal solution. Similarly, for someone who is planning to make overpayments larger than 10% of the outstanding balance, tracker mortgages are the path to move forward avoiding early repayment penalties.

Tracker Mortgages: Pros and Cons

#PROS

  • Tracker mortgage rates updated during COVID-19 pandemic are cheaper than other mortgage deals
  • The base rate has not changed much in the past. The base rate has been below 1% for over 10 years
  • You can overpay your mortgage quickly and be mortgage-free! It will also be with less overall interest compared to a fixed deal.
  • When the base rate goes down (currently 0.5%), your monthly mortgage payment will also get reduced.
  • In case the base rate goes up, you can simply switch to a fixed deal mortgage without any early repayment charge!

#CONS

  • There is a risk of base rates going up and the tracker rate become highly volatile. (you can overcome this issue by entering a tracker deal without early repayment penalty and switching to a fixed deal once this happens)

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