Tracker mortgages are a type of variable rate mortgage.
Unlike a fixed rate mortgage, where the interest rate is fixed for the duration of your loan, a variable rate mortgage often follows the lender’s Standard Variable Rate (SVR).
Should the lender’s SVR be decreased, the rate on a variable rate mortgage will correspondingly decrease, meaning your mortgage payments will become cheaper. Should it rise, so too will your mortgage payments.
However, with a tracker mortgage, rather than following a lender’s SVR they track an economic indicator, such as the Bank of England base rate.
Tracker mortgages guarantee to remain at an agreed amount above the base rate, meaning that should the base rate rise or fall, so will your mortgage rate.
If you were to buy a property today, with a tracker mortgage that tracks at 2% above base rate, you would pay 2.1% (as the base rate is currently 0.1%).
Should the base rate rise to 0.25%, your mortgage rate will rise to 2.25%. If the base rate should fall to 0.05%, your mortgage rate would drop to 2.05%.
Most tracker mortgages are taken out for a period of 2 to 5 years, after which time you must remember to remortgage, or you will be put onto the lender’s SVR mortgage rate.
However, it is possible to take out a tracker mortgage for longer.
A lifetime tracker mortgage is a tracker mortgage that lasts for the duration of your home loan.
So, if you were to buy a property with a 25 year term with a lifetime tracker mortgage, you would have this mortgage for the full 25 years, until the loan is fully repaid.
It is also possible to take out lifetime offset tracker mortgages, which allow you to use any savings you have to offset the amount of interest your mortgage accrues, although these are becoming few and far between.
The first, obvious benefit of a lifetime tracker mortgage is how easy they are.
You simply take out one home loan on your property and that is it until the whole duration of the mortgage is up. You won’t have to worry about remortgaging every 2 to 5 years and can just sit back and relax.
A lifetime tracker mortgage can also save you money in the long term, for the simple reason being that remortgaging is not free. Most lenders charge an arrangement fee when you move to one of their mortgage products that can be anything up to £2,500, and you must pay this each time you remortgage.
If you were to remortgage every 2 years for a 25 year period this could equate to over £25,000, which you would save by taking out a mortgage lifetime tracker deal.
Many lenders ask for valuations to be carried out when you remortgage to their products, so you would additionally be saving yourself time and trouble using this mortgage product.
Most lifetime tracker mortgages also allow you to make unlimited overpayments and come with no early repayment penalties. This means, should you find yourself in a position to make significant overpayments, or even pay off your mortgage early, you can do so without being charged the penalties that other mortgage customers would be charged.
Tracker mortgages in general are popular at the moment as interest rates are so low; indeed, the base rate has been under 1% for over 10 years now.
They are also seen as transparent, when compared to other variable rate mortgages.
Variable rate mortgage rates change when the lender decides to alter its SVR, which is usually roughly in line with the base rate. However, while lenders are often quick to increase their SVR when the base rate rises, they can be very slow to reduce their customers’ mortgage rates, when the base rate falls. Lenders also have the power to alter their SVR as much or as little as they like, which can be frustrating if your mortgage is linked to it.
Tracker mortgages, on the other hand, are set to track the base rate exactly, meaning lenders must react in a timely fashion. So, if the base rate falls, you will see the reduction in your monthly payments soon after.
Of course, all mortgages have their downsides and when you’re looking at a loan that will last for the entire duration of your mortgage term, it is important to understand what you’re getting into.
For a start, lifetime tracker mortgage rates tend to be higher than standard tracker mortgages so you need to assess how this would affect your monthly payments.
It’s also hard to predict what interest rates will do in the next year, let alone where they will be in 25 years’ time. The base rate has been lower than 1% since 2009, and is currently just 0.1%, making tracker mortgages an attractive option now. But should the base rate rise, which is going to happen at some point, your monthly mortgage payments will increase. Should the economy boom, the base rate could rise significantly.
You therefore need to feel confident you could cope financially, if your mortgage rate increases by 1% (or more).
While most lifetime tracker mortgage products follow the Bank of England base rate, this is not always the case.
Some track the LIBOR (London InterBank Offered Rate) which is the interest rate used for borrowing between banks. However, as LIBOR is due to be phased out in 2021, these products are becoming rarer.
Some lenders will even label a mortgage product as a tracker, when in reality it is essentially just tracking the lender’s own standard variable rate.
Take some time to check exactly which financial indicator the mortgage product is following to ensure you are getting a true tracker mortgage.
Once you sign up to a lifetime tracker mortgage you will be tied in until you have finished paying off the mortgage, or you decide to sell your home.
While it is possible to exit a lifetime tracker deal early, you will be subject to hefty penalties, so bear this in mind when taking one out.
Lifetime tracker mortgages are tracker mortgages that you repay until the mortgage is paid off, or you sell the property.
They are two very different products, so take care not to confuse the two.
If you wish to start looking for the best lifetime tracker mortgage rates to suit your circumstances, you’ll need to see what each mortgage provider has to offer. Unfortunately, as each lender calculates their arrangement fees and other charges slightly differently, it can feel like a daunting task to compare one product with another.
Thankfully, comparison websites such as Bankrate can help to cut through it all, letting you focus on the important parts.
Not only do they allow you to compare different loan to value (LTV) ratios, a comparison site will list all similar products side by side, allowing you to compare fees and other charges and work out which will be the best lifetime tracker mortgage for you. However, as all lenders are not listed on one comparison site, it is worth checking a few, to ensure you don’t miss one.
If you feel that you would benefit from some mortgage advice, consider speaking to a mortgage broker.
A good broker can examine your situation and recommend the cheapest lifetime tracker mortgage for your needs, as well as put in the applications to the lenders for you. While this advice will come at a cost, you could find it is well worth paying for.
Brokers can be paid in different ways so make sure you understand how their fees and commission work. You can also check that they are authorised to advise on the Financial Services Register.
If you are stretching yourself to buy a property and need to stick to a strict budget to get by, any type of variable rate mortgage, including lifetime tracker mortgages, would be an unwise choice. By choosing a fixed rate mortgage instead you would have the peace of mind in knowing your mortgage payments will not increase during the term of the loan.
If, on the other hand, you’re in a strong financial position so can cope if interest rates should rise, you prefer the flexibility of being able to make unlimited overpayments, and like the idea of never having to remortgage again, a lifetime tracker mortgage could be well worth investigating.
Find out how much you can borrow with this mortgage calculator.
The COVID 19 coronavirus pandemic has been a stressful time for many homeowners who are struggling to pay the bills.
On 2 June 2020, the Financial Conduct Authority (FCA) confirmed that homeowners who are struggling with their finances due to the pandemic could apply for a second, 3 month mortgage payment holiday.
If you are struggling to make your mortgage payments, it could be worth agreeing to a mortgage payment holiday with your lender. However, if you can avoid doing so it will be to your benefit. This ‘holiday’ simply means your mortgage term will be extended for an extra three months, during which time it will continue to accrue interest.
On a side note, the 3 credit agencies agreed that customer’s credit scores would be maintained during this period for those who decided to take payment holidays. However, this protection will end on 31 October 2020. This means that if you can’t resume full mortgage payments after this date, this will be reported on your credit file, which could affect your ability to get credit in the future.
If you are unable to start making full mortgage payments after this date It is vital to speak to your mortgage provider as soon as possible. Lenders may agree to a further period of payment deferral, reduced payments, or a mortgage term extension to help you get back on track.