why is tracker mortgage becoming more popular?

I have been playing with Google Trends and have noticed one thing. Tracker mortgages are in significant rise. From early September to late October the number of searches for tracker mortgage went up by over 450%.

There is a good reason for this. I will explain below what tracker mortgages are. I will also give my view on why the interest in these has all of a sudden jumped so much. 

The strategy that I will explain below might make sense for some. Others however will find a lot of risk with it and would never even consider going down this path.

what is a tracker mortgage?

Tracker mortgage is a repayment type of mortgage. The interesting thing about these is – the interest rate you are paying isn’t fixed. Instead, this is linked to the rate that the Bank of England calls its Base Rate.

The process with these is fairly simple. Your high street bank takes the base rate from Bank of England. Your lender applies extra interest on top of Bank of England Base Rate. The extra is the banks profit margin.

An example of the above is – a high street lender who offers a tracker mortgage 1.5% above BoE Base Rate. In the current environment that would mean – 2.25% BoE Base Rate + 1.5%. The total rate you would be charged would equal 3.75%.

The actual difference your lender will charge you on top of the base rate will depend on your LTV, your credit score and history as well as which lender you decide to go with.

why are people interested in these lately?

The below will only be my personal view so don’t take it as a fact. I do however think that the reason there is so much interest in these lately – the sudden increase in the rates of standard repayment mortgages.

Currently, the average standard 2 year fixed rate is somewhere between 6% and 6.5%. The premium that most lenders charge on trackers currently sits at roughly 1.5% on top of BoE base rate.

What this means, as of today the average difference between the two types of rates is nearly 3% points. For someone with an outstanding mortgage balance of £200,000 – the monthly payments could be up to £500 less with tracker mortgage.

That’s a sizeable difference to consider. The biggest factor that will make you decide in favour of one or the other is how risk averse you are as well as where do you believe the BoE base rate will top at. 

Tracker mortgage are also great when the interest rates start dropping. This will become a monthly saving to you as your mortgage will be cheaper every time the BoE drops the base rate.

what are the risks of a tracker mortgage?

The biggest risk with tracker mortgages is obviously the fact that they are linked to Bank of England Base Rate. This risk becomes even bigger during times of high inflation when the central bank is trying to counter the price increases by increasing its base rate.

This is where having a view on how far the interest rates will go is really important and can determine if you will consider a tracker rate or not.

One way of looking at this issue however is by comparing the current fixed rate and how far the base rate will climb. 

Let’s imagine you are currently offered 6.5% fixed rate on the one hand. On the other hand – you get a base rate + 1.0% on top of that. This would mean – as long as base rate stays below 5.5% you would still be better off with the tracker rate.

On top of this, if you think the base rate will start dropping quick – the rate you actually pay would soon start dropping as well. With that obviously come reduced monthly payments.

While this strategy that has some risk I understand why many choose to explore this in the current environment. The main question however is – can you sleep well at night knowing this potential exposure?

anything else to be aware of?

There is an additional benefit you could get with tracker mortgage. Firstly, there are no overpayment limits. This means you can put any amount of cash into the mortgage at any point and have no penalties to worry about. Most traditional mortgages allow to overpay by only up to 10%.

This leads us to a second point – you can get a new mortgage at any point without any exit penalties. This gives you an opportunity to fix your rate when you feel the market is in a more comfortable place for you personally.

summary

Tracker mortgages are an interesting product and something definitely worth considering in the current environment. As the difference between base rate and mortgage rates has grown significantly – tracker mortgages started making a lot more sense all of a sudden.

These types of mortgages can clearly bring a benefit during the times when central bank is reducing the base rate. There is however more risk during the times when you don’t know how far the base rate might climb.

The potential size of an opportunity is putting tracker mortgages in a definitely consider bucket in my personal view. While it is clear that this product won’t work for everyone, it might be just right for some.

My only ask of you at this point would be – have a play with an online mortgage calculator. See what a potential increase in base rate could mean to your monthly payments. Being confident and not losing your home has to be the key priority here.