Being a homeowner means making many decisions. But one of the most important ones you face is deciding on the mortgage product to choose. It’ll have a big impact on your monthly outgoings and the interest paid over the length of your mortgage.
With interest rates starting to rise, is staying with a tracker mortgage the right decision for you?
If you’re grappling with the type of mortgage product to choose, it’s worth quickly refreshing your memory on what the main types are:
Tracker: A tracker mortgage will track the Bank of England (BoE) base rate. The interest you pay will be the BoE rate plus a defined amount on top of this, such as 2%. This means your interest rate will rise and fall depending on what the BoE sets.
Variable: A variable mortgage is similar to a tracker mortgage in many ways; it can increase and decrease over the length of your mortgage term. However, rather than being linked to the BoE, it will be dependent on your lender’s rate.
Fixed: Unlike the other two types of mortgage, a fixed rate remains the same throughout the term, usually two, three, five or 10 years. It won’t be affected by changing interest rates at all.
If you’re considering moving away from a tracker mortgage, it’s probably a fixed rate option you’re looking at. A variable mortgage will broadly have the same pros and cons as a tracker.
Why is now the time to look at the type of mortgage you have?
It’s always important to ensure that you have the right type of mortgage for you. But the topic is particularly crucial now; BoE interest rates are gradually increasing.
Following the 2008 financial crisis, the BoE rapidly reduced its base rate, reaching 0.5% in 2009. This then decreased further in 2016 to 0.25%. It means we’ve had an extended period of very low interest rates, making it an excellent time to choose a tracker mortgage.
However, rates are now starting to rise. In the last 12 months, the BoE has increased rates twice; first in November 2017 to 0.5% and then to 0.75% in August 2018. As the economy continues to recover, it’s expected that further rises are on the horizon.
If you currently have a tracker mortgage, you’ll already have been affected by the two recent rises. As a result, you may be wondering if it’s worth sticking with what you have or looking at alternatives.
Tracker deals usually last for a set period of time, such as two, three, five or 10 years, but it’s also possible to opt for a lifetime tracker that will last the full length of your mortgage. Once the term ends, if you’ve not repaid the debt, you will need to select another product, or your lender will usually move you on to their Standard Variable Rate (SVR). The SVR is often more expensive and unlikely to be competitive.
With more BoE rate rises expected, which will have a direct impact on the interest you pay on a tracker mortgage, should you consider a fixed rate option? As with most financial decisions, it comes down to what your priorities are. These pros and cons can help assess whether a tracker or fixed rate mortgage best matches your circumstances.
Reasons to stay on a tracker mortgage
Rates are still low: Rates are increasing but they are still very low. The lower the BoE interest rate the more attractive a tracker mortgage is. Prior to the financial crisis, interest rates had remained around the 5% mark for several years. Even when you factor in a rise, the interest you pay on a tracker mortgage is likely to be relatively little.
Your initial rate will be lower: With a fixed rate mortgage, you pay a premium for the security offered. As a result, the initial rates that you start paying on a tracker mortgage will be less. It means your short-term monthly payments, at least, will be lower.
You’ll benefit if rates decrease: It’s expected that interest rates will continue to rise but there’s certainly no guarantee that will happen. The BoE rate is dependent on the economy, so should it start to falter, for example, following Brexit, there’s always a chance that rates will fall. Should the BoE reduce the base rate in the future, you’ll benefit by being on a tracker mortgage.
Overpayment opportunities: We’ve already mentioned that a tracker mortgage is likely to offer you a lower interest rate at the moment. This gives you a good opportunity to overpay your mortgage and reduce the level owed quicker. Some tracker mortgages won’t charge you if you make early repayments, but others will, so make sure you check the terms of your arrangement.
Increases are likely to be gradual: Interest rates have been low for almost a decade, it’s unlikely that they’ll reach pre-financial crisis levels soon. It’s reasonable to expect the BoE to take a cautious approach, gradually increasing the base rate over time. As a result, you can choose a tracker mortgage with a shorter term now, and still have the option to fix the interest rate in the future.
Reasons to move off a tracker mortgage
Mortgage payments may increase: As stated, many are anticipating that the BoE rate will continue to rise. If you have a tracker mortgage, this will have a direct impact on the amount of interest you pay and monthly outgoings. Choosing a tracker mortgage means your payments are likely to increase over the coming months and years, although there’s no guarantee of this.
They don’t give you certainty: If you like to know what will be going out of your bank every month, a tracker mortgage may not be the right option for you. Your payments will fluctuate as the BoE changes its interest rate. If you prefer certainty, choosing a fixed rate mortgage can be more appealing and help you budget.
Switching gives you a chance to fix a low interest rate: If you believe interest rates will rise further, as many do, switching to a fixed rate product allows you to take advantage of the low interest rates for a defined period of time. You’ll likely pay more to begin with, but over the long term, a fixed rate mortgage can mean paying less interest.
Whether it’s worthwhile staying on a tracker mortgage will depend on you and your circumstances. If you’re not sure which mortgage type to choose, we can help. As mortgage experts, we can support you from the initial step of choosing the right product to helping you secure a competitive deal. Get in touch today.