Tracker & Variable Rate Mortgages

General - What are they all about? - So where is the catch? - Set up costs

Tracker & Variable Rate Mortgages, General

Tracker rate mortgages suit clients who have a flexible budget and can absorb a degree of interest rates rises.

 

Tracker rate mortgages are often chosen by more experienced mortgage clients or those with the ability to absorb interest rate changes. Tracker rate mortgages also suit those who are a little more speculative and feel mortgage rates will on average will stay the same or fall during the term of their mortgage or rate special offer period.

Tracker rate mortgages will follow (track) a specific interest rate index. For residential mortgages this is usually the Bank of England Base Rate (BOE), however some lenders use London Inter Bank Offer Rate (LIBOR). Of the two indices the Bank of England is often the lowest, more stable and most well known.

Unlike fixed rate mortgages which can be quite have quite high early repayment or exit charges, tracker rate mortgages can come with lower or no early repayment charges. It must be said that if you want the freedom offered by a mortgage with low or no early repayment charges, you will tend to pay a premium in terms of interest rates or booking fee's.

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Tracker  & Variable Rate Mortgages, so what are they all about?

A tracker rate mortgage is similar to discount/variable rate mortgages, however it is far more transparent and fair to mortgage holders. The core difference between a tracker rate mortgage and a discount/variable rate mortgage comes in how any rate changes are passed on to the mortgage holder. With a tracker rate mortgage when the underlying index changes, the full change is passed on to you. Where as with a discount/variable rate mortgage, the lender decides what if any of the rate change they will pass on. This often means that discount/variable rate changes are determined by the lender's need for profit and general market forces.

To give an example, with a tracker rate mortgage where the Bank of England put its base rate down 0.25%, the full 0,25% reduction will be passed on to the mortgage holder. Conversely, someone on a variable rate mortgage may only receive a 0.15% reduction in their rate. This was best demonstrated recently in October 2008. The Bank of England reduced rates by 0.5% yet Northern Rock only passed on 0.15% to its variable rate mortgage holders. Discount/Variable rate mortgage lender's do tend to pass on most of any rate changes. A lender who does not alter their variable rate broadly in line with any base rate changes would quickly become uncompetitive.

As with fixed rates, you can commonly get a tracker rate mortgage deal for the first 1,2,3 or 5 years your mortgage. Where you will be on an initially lower rate for the first few years after which time you revert to the lender's normal higher tracker rate or sometimes standard variable rate (standard variable rate being the less transparent of the two).

 

"...As with fixed rates, you can commonly get a tracker rate mortgage deal for the first 1,2,3 or 5 years your mortgage."

In addition to the short term special offers, lenders are increasingly offering lifetime tracker rates. This is where the lender offers a tracker rate product that lasts the life of the mortgage, thius avoiding the need to switch products/lenders every few years.

You will often see tracker rate mortgages described as follows:

BOE Tracker plus 0.49% until 31/05/2011.

(In plain English, this means the interest rate will be The Bank of England base rate plus 0.49%. until 31stMay 2011)

So if when you are taking out the mortgage, The Bank of England mortgage interest rates is 5%, the interest rate on your mortgage will be 5% + 0.49% = 5.49%. After 31/05/2011 your mortgage special offer will expire and you will either revert to the lender's normal higher tracker rate or sometimes standard variable rate. It is important to note that the cost of your mortgage will rise and fall each time mortgage interest rates on the given index are adjusted.

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Tracker Rate Mortgages, so where is the catch?

Tracker rates offer what a fixed rate mortgage doesn't. When interest rates and your mortgage payment are reducing you may feel you have made the right choice. Equally, when rate are rising and you may be feeling the squeeze it is easy to long for a fixed rate.

No one has a crystal ball or knows what rates are going to do, so it's important to be clear in the reasons why you might take a tracker rate in the first place. Make sure you take a tracker rate mortgage beceause you wanted flexibility, transparency and felt your budget could afford rate rises. Do not take a tracker rate mortgage simply because it had the lowest rate.

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Tracker Rate Mortgages, set up costs.

As previously mentioned, tracker rate mortgages are in effect a special offer product. To obtain the  tracker rates offered you usually will have to pay a booking fee. Over the last 18 months there has been a move by the lenders towards higher booking fee's. Historically you may have been able to obtain a tracker rate mortgage with a booking fee of £399, now a Lender is more likely to charge £699-£1999 or 0.5% - 1.5% of the amount borrowed for their lowest fixed rates.

"...It is extremely important not to become totally rate focused when choosing your mortgage."

 

It is extremely important not to become totally rate focused when choosing your mortgage. A very low tracker rate mortgage (often the ones that look too good to be true) may come with excessive booking fees and very little flexibility, making it very costly in the long run. If briefed to find the best mortgage deal, a good Independent Financial Adviser will run an analysis based not only on the rate, but the amount you intend to borrow, the total interest and fee's payable when working out which mortgage is most suitable for you.

If you are considering a new mortgage or remortgage, please feel free to contact us to talk with an Independent Financial Adviser and Mortgage Broker. We are able to provide home appointments across the whole of West Sussex - Brighton, Hove, Haywards Heath & Crawley, East Sussex, Surrey - Croydon Sutton, Reigate, Redhill,  South London - Wimbledon, Fulham, Chelsea and Hammersmith and Central London.

"Your home may be repossessed if you do not keep up repayments on your mortgage."

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