May 21st, 2024
As a first-time buyer, the variety of mortgage options available can seem overwhelming. Among the different types you will encounter is the tracker mortgage—a term that grabs your attention but also leaves you with questions.
Here, we break down what this option means, its features, and potential incentives/risks.
What is a Tracker Mortgage?
A tracker mortgage is a type of variable rate mortgage that follows – or tracks – another interest rate, usually the Bank of England’s Base Rate.
The interest rate on a tracker mortgage is pegged at a fixed margin above or below this rate. For example, if the Base Rate is 5.25%, and your tracker mortgage is set at Base Rate plus 1.5%, your actual mortgage rate would be 6.75%.
They can typically be arranged over a period of two, three, five or ten years, and you’ll normally be moved to the lender’s standard variable rate (SVR) when your deal expires. This can be a higher cost to you each month, making it a good idea to look into remortgaging when approaching the end of your tracker deal.
Key Features
– Flexibility: Tracker mortgages are known for their flexibility, often featuring fewer penalties for overpayments or for switching mortgage providers compared to fixed-rate mortgages.
– Transparency: The rates are straightforward, directly linked to the publicly known Base Rate, which helps you anticipate changes.
Why Consider?
Understanding when a tracker mortgage is beneficial depends on your financial stability and risk tolerance. If the Base Rate is low, as it has been in recent years, you could save money compared to fixed-rate mortgages.
However, this advantage comes with the uncertainty that rates might increase in the future, affecting your monthly repayments.
The Bank of England has held the Base Rate at 5.25% for the sixth consecutive meeting, with many experts predicting a drop in this rate later this year. This could therefore make a tracker rate a more appealing option for many homeowners.
The up and down nature of this mortgage option is as much an incentive as it is a risk, as any increase in the Base Rate leads directly to higher mortgage costs.
For instance, a 1% rise in the Base Rate can increase the monthly repayment amount of a £200,000 mortgage by approximately £100.
As a first-time buyer, choosing a tracker mortgage involves balancing potential savings against the risk of rising rates.
Whether you choose tracker or fixed may be dependent on your individual situation, and at CMME we provide bespoke advice catered to your unique circumstances. To get started, click here and book a FREE initial no obligation call with our team.