What’s The Best Tracker Mortgage?

by Caleb James on 20 Jul, 2012

A tracker mortgage is similar to a variable rate mortgage in that the interest rate has the potential to change. However, Tracker mortgages typically track the Bank of England Base Rate, whereas a variable rate mortgage uses other market indices as the base line for varying the interest rate charged. Most tracker mortgages track just above the base rate, so if for example the base rate is currently 4.2 per cent, a typical tracker mortgage might charge an interest rate of one per cent above the base rate. In this example, the interest rate charged to you would therefore be 5.2 per cent. This means that the mortgage interest rate will go up or down depending on the Bank of England Base rate. The tracker can be set for a fixed term or for the duration of the mortgage term.

Who would Benefit

Tracker mortgages are usually attractive to those who are new to the property market, for example, first time buyers. This is because the introductory rate offered for tracker mortgages is usually very low compared to standard fixed rate mortgages, meaning that there is the potential for significant savings early on in the loan arrangement. However, market conditions inevitably change and there is the risk of interest rates going up so high that repayments end up being significantly more than the original loan amount. This type of mortgage is probably not suitable to those who are risk averse, those who have dependent families, or those who live month to month with little savings. When the Bank of England Base Rate changes, the reflected change in mortgage payments can happen in as little as a month, so being prepared for this eventuality is a must.

Mitigating Risk

Drastic changes can be mitigated by opting to go for a tracker mortgage which is only for a fixed term, for example, one or two years. In addition, it is possible to opt for tracker mortgages with a drop lock facility. This essentially means that you can change to a reasonable fixed rate very quickly should the interest rates change drastically. Ask your mortgage advisor about this.

The Best Deals

There are a number of good tracker mortgage deals available at the moment because the Bank of England Base Rate is currently relatively low. Working out which is the best tracker mortgage deal for you can be tricky, especially if you are new to the world of mortgages. There are a number of ways of comparing deals in a neutral way such as comparison websites. Currently, the Post Office, Natwest and Santander are offering tracker mortgage deals which are very reasonable. For example, the Post Office deal at the time of writing is at a base rate of 2.89 per cent for two years. You do need a 25 per cent deposit though and the final interest rate at the end of the two years is 4.9 per cent. If you are a Natwest customer, you can also get the introductory rate of 2.89 per cent, but if you are not a customer, the introductory rate is 2.9 per cent. RBS also offer this rate. Santander starts at a slightly higher rate of 3.34 per cent.

About the Author

Caleb James

Caleb James is a financial advisor and journalist, who contributes regularly to financial blogs and industry publications.