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Contact us | www.future-financial.co.uk | E-mail your comments | Archive | |
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Tracker mortgages According to recent reports, one lender has seen a big shift towards borrowers seeking tracker mortgages. Why is this ... and is it a good thing?
This is a good time to start off with the usual warning about always seeking individual advice before making any decision about your personal finances, because nothing written in an article like this can possibly apply to everyone. However, it is worth considering the broad principles, to which individual circumstances can be applied. What are trackers? Most mortgages were historically based on variable interest rates. This meant that the lender could vary the interest payable up or down virtually at will, with no regard to external conditions (other than, perhaps, competition). Unsurprisingly, this did not appeal to many borrowers and the trend developed for lenders to offer fixed rate mortgages or, sometimes, capped rate mortgages. The latter were a kind of fixed/variable rate hybrid; they could go down if prevailing rates fell, but future fluctuations could not take them above the cap. Some lenders, however, recognised that borrowers might prefer a level of predictability without having to be tied in for a fixed term to one rate. As a result they created the tracker mortgage, tying the interest rate they charge to a fixed differential compared with an index often the Bank of England’s base rate, although some other indices are also used, including the lender’s own base lending rate. So if the fix was 0.5% above Bank of England base rate, while that rate stood at 5%, borrowers in the tracker would pay 5.5%; now they would be paying 1%. In fact at one time, some ties were actually set at 0.5% below base and these lucky borrowers could now be paying nothing (most are actually paying a modest amount as lenders’ systems will not cope with receiving nothing each month). Why are they becoming more popular? There are currently a number of tracker deals available, typically at between 1.9% and 2.8% above base rate, depending on the type of mortgage. The reason why people like them is that they offer some protection against lenders hiking interest rates by a larger percentage than the Bank of England. Whether or not these offer good value depends on your view of how the market generally will go; that is, will lenders push up their interest rates more quickly or more slowly than base rate rises? And, of course, what will actually happen to base rate? What are the possible pitfalls? Another potential issue is the so-called ‘collar’ that lenders now apply to trackers. As indicated earlier, some lenders have been badly caught out by the fall in base rate to such historically low levels. As a result most, if not all, will now apply a level below which their interest rates will never fall, whatever happens to base rate. Whether or not a tracker is for you or you might prefer one of the alternatives currently available will depend on your personal circumstances. Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser. |
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©futurefinancial This publication represents our understanding of law and Inland Revenue practice as at the date of publication. It does not provide individual tailored investment advice and is for guidance only. Rules may vary for Scotland and Northern Ireland. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. The value of land and buildings is generally a matter of a valuer’s opinion rather than fact. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Your home may be repossessed if you do not keep up repayments on your mortgage. Loans are subject to status and written details are available on request. Always seek independent advice from a qualified financial adviser. Think carefully before securing other debts against your home. Fees for mortgage advice maybe charged and for details of these please contact us. The Financial Services Authority does not regulate all the activities undertaken by the company, including taxation advice and overseas mortgages. |
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