Source: The Times Money Mentor —
With many low interest fixed-rate mortgage deals due to expire this year, borrowers may be asking what to do next and considering whether a tracker mortgage is a good option.
A new report from the Office for National Statistics reveals more than 1.4 million UK households are set to face a significant rate rise when they remortgage in the coming months.
Given how much more expensive mortgage fixes are now, compared to a year ago, some people may be tempted to opt for a tracker – whose rates tend to be cheaper – as opposed to locking in for a set period.
We take a look at:
- What is a tracker mortgage?
- How often do payments on tracker mortgages change?
- What are the pros of tracker mortgages?
- What are the cons of a tracker mortgage?
- Which borrowers stand to benefit from a tracker – and which don’t?
What is a tracker mortgage?
A base-rate tracker follows the Bank of England (BoE) base rate – plus a margin on top.
Say, for example, you were paying interest of 4% before the base rate went up in December, your mortgage rate would have gone up in line with this, by 0.5% to 4.5%, to reflect the increase.
Tracker rates are transparent, unlike discounted variable-rate deals, which are linked to the lender’s standard variable rate (SVR). With a tracker, you know exactly what you will be paying after any base rate rise (or fall).
If you take out a fixed-rate mortgage, however, you don’t have to worry about your borrowing costs changing over the term of the loan, as the interest rate you pay will stay the same for a set number of years. This offers security, but for some, it could lead to higher payments.
How often do payments on tracker mortgages change?
Tracker mortgages – which you can take out for anything from two to ten years – move in line with the base rate.
This means that your monthly payments could rise as soon as next month if the bank rate goes up, as is expected in February, due to underlying high inflation (currently at 10.5%), and strong wage growth.
The Bank of England votes on possible changes to the base rate roughly every six weeks, so potentially, the amount you pay for a tracker could change that often.
Why are tracker mortgages so relevant right now?
While mortgage interest rates have dipped slightly compared to the highs seen in the aftermath of the mini-budget, they are still significantly higher than most borrowers will have previously been paying.
With household budgets set to be stretched even further by the cost of living crisis, those now needing to remortgage may be tempted to opt for a tracker, as opposed to fixing at the current levels.
Mark Harris from mortgage broker, SPF Private Clients, said: “Many borrowers are opting for trackers because fixed-rate mortgages are relatively expensive, following the fallout from the ill-fated mini-budget.”
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