Many mortgage borrowers are opting for a tracker mortgage at the moment, in the expectation of enjoying rock-bottom mortgage interest rates during the remainder of 2010. Choosing the mortgage that is right for you depends on your personal priorities, however, and the only essential is taking good, independent mortgage advice.
It really is ‘horses for courses’, when considering the various types of mortgage!
The tracker mortgage
In a tracker mortgage, the mortgage is anchored to the Bank of England base rate, plus your lender’s margin on top. This means that with mortgage interest rates currently at 0.5% and a typical lender’s margin of 3%, a tracker product might offer you a mortgage with a 3.5% interest rate.
Many tracker deals come with a tie-in period of 2,3 or 5 years, during which your lender cannot change their margin and your mortgage can rise only as and when the Bank of England raises the base rate.
Rises in the base rate happen in 0.25% increments, and experts are predicting that it is very unlikely that mortgage rates will rise significantly before the closing months of 2010 at the earliest, and that they will rise slowly even then.
Currently the best trackers are, on average, 1.5% lower than the best fixed rates. It would take a substantial rise in bank rates for a borrower who takes a tracker to be worse off than one who opts for a fixed rate.
The drawback to buying into a tracker deal is the set-up fee, and also the exit fees if you decide to change.
Furthermore, during your tie-in period with a tracker mortgage, it is the Bank of England and not your lender who controls your mortgage repayment.
Another consideration is that, while a shorter-term 2-year tracker may seem attractive in the current low-interest climate, a longer-term tracker of 5 years could leave your mortgage repayment sailing upwards if bank rates nudge back towards previous levels of around 5% by 2015.
SVR and fixed-rate mortgages
The other types of mortgage, such as SVR mortgages and fixed-rate mortgages, each offer particular characteristics that may be valued by some mortgage borrowers.
For those who wish to avoid the tracker mortgage’s set-up and exit fees, for example, opting for their lender’s Standard Variable Rate (SVR) mortgage involves no set-up charges or exit charges. This is because you come to the end of your tie-in period and default on to your lender’s SVR, rather than ‘buy into’ it as a new deal. The SVR mortgage also leaves you free to make a low-cost switch to another product in the coming years.
Many mortgage borrowers, and first-time buyers in particular, value the security of knowing that their mortgage repayments cannot rise beyond a certain maximum level.
For those wishing to cap their potential mortgage repayments and have the security of knowing they have a payment they can afford, no matter what the Bank of England does next year and beyond, then a fixed-rate may be the mortgage of choice.
