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Your Money > Mortgages Articles > The right tracker...
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By Sarah Modlock
Most homeowners don't know what a tracker mortgage is according to Alliance & Leicester Mortgages. Their research shows that homeowners could be missing out on great deals because of this. Not understanding what a tracker mortgage is means many homeowners could be unaware of an option which could keep their monthly payments down. If you are in the dark, then help is at hand. Tracker mortgages have variable rates which are closely linked to the interest rate set by the Bank of England. This is known as the 'base rate' and it is reviewed each month. Some trackers follow the British Bankers' Association LIBOR. This is the most widely used benchmark or reference rate for short term interest rates. LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks could borrow funds from other banks, in marketable size, in the London interbank market. How trackers work Tracker rates are usually set at a slight margin above the base rate - usually a percentage, such as 0.75% above base rate. Of course, this is good news when rates are dropping but it works the other way too. Climbing rates will be passed on to you as well. But trackers are often chosen as a middle ground between fixed and variable rate mortgages as they tend to offer low rates and transparency. When rates are cut, lenders often take them time passing on the benefits to borrowers - although they are usually quick off the mark to put increases into effect. With a tracker mortgage, you can reap the rewards straight away when the base rate drops. It is possible to get deals which track the base rate for the life of a loan. An alternative is a deal which tracks base rate for just a few years and then automatically switches to the lender's standard variable rate (SVR). These are notoriously uncompetitive and signal the time to shop around again. Just make sure you are not locked into the SVR for a period after the tracker rate ends. Collars and scuffs 'It is quite worrying to think that such a large proportion of homeowners are unaware of what a tracker mortgage is and how it could save them money on their monthly mortgage payments,' says Alliance & Leicester's Stephen Leonard. 'There are certain advantages to choosing a tracker mortgage, especially with current low interest rates. However, homeowners should ensure they fully understand what type of mortgage they have; they can then be financially prepared should their monthly payments rise,' Trackers also have their own little pitfalls to watch out for. For instance, some lenders will guarantee that the pay rate will not rise over 1% above the base rate, yet the small print states that in exceptional circumstances the company can waive the guarantee. Check to see if your tracker mortgage lender reserves the right 'to review the tracking differential' should the base interest rate drop below a certain level - it could leave you open to paying more than you expected. Watch out for tracker mortgages that have 'collars' attached. These stipulate a minimum rate that you will be required to pay no matter how low the base rate may go. Most of all remember that the base rate can rise as well as fall. Take independent advice if you are not sure whether a tracker is right for you. So what sort of borrower is likely to do well from a tracker mortgage? A&L's Stephen Leonard says: 'Tracker mortgages generally suit those who have a degree of flexibility in their budget and so stand to benefit from cuts in their monthly mortgage payments following a base rate cut, as well as afford any increases. Whilst it is understandable that there are more non-homeowners who got the answer wrong, this includes those who are looking to get on the property ladder in the near future. It is important they seek advice from a qualified mortgage adviser to ensure that the mortgage they choose will be right for their individual circumstances.' Current best buys Current best buys include Bradford & Bingley's MarketPlace exclusive stepped tracker from Lloyds TSB Scotland. It provides a variable rate which is 0.51% below Bank of England Base Rate, currently 4.5%, until 31 December 2006, to give a current rate payable of 3.99%. This is followed by a variable rate which is 0.50% above Bank of England Base Rate, currently 4.5%, until 31 December 2007, to give a current rate payable of 5%. The third step is a variable rate which is 0.75% above Bank of England Base Rate, currently 4.5%, until 31 December 2009, to give a current rate payable of 5.25%. The fee is £235. Another exclusive available through Bradford & Bingley's MarketPlace is the Alliance & Leicester discount tracker. The variable rate starts at 0.14% above Bank of England Base Rate, currently 4.5%, for 24 months, to give a current rate payable of 4.64%. If the Bank of England Base Rate changes, then your monthly repayments will be recalculated on the first of the month following the announcement. This is followed by a variable rate which is 1.00% above Bank of England Base Rate, currently 4.5%, for 276 months, to give a current rate payable of 5.5%. The fee is £495. Information correct as at 8 January 2005. |
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