The UK is a haven of great investment property opportunities. In recent years, the tracker mortgage has grown in popularity thanks to the Bank of England’s low rates, but with hints of rates going up it might be time to review your tracker mortgage deal.
Tracker mortgages are designed to track the Bank of England ‘base rate’. When the base rate goes up, so do tracker mortgage rates, which may make these less competitive than fixed mortgages moving forward.
Here, Liquid Expat Mortgages take a closer look at the facts to help expats thinking of remortgaging.
A brief outline
The first thing to recognise about tracker mortgages is that they aren’t entirely predictable. Unlike a fixed-rate or a Standard Variable Rate (SVR) mortgage, they are not set by the lender. Tracker mortgages follow the ‘base rate’ set by the Bank of England (BoE). This attempts to mirror the wider state of the British economy – when it is struggling, the rate decreases, and when it is healthy, there’s a corresponding rise.
Lenders don’t charge the percentage finalised by the BoE – they use it as a grounding and add their own rate on. Still, tracker mortgage deals can be cheaper than other types of agreements; lasting 2-5 years typically.
Once this deal comes to an end, the tracker mortgage tends to switch over to the lender’s Standard Variable Rate. However, it’s still possible to remortgage before you are locked in to another deal.
How to analyse rate offers
Currently the BoE’s base rate is set at 0.5%. A lender may, for instance, advertise a mortgage product that is +2.7% on a tracker status. That means the total amount of interest is 3.2% (i.e. 2.7% added to the 0.5%).
When the base figure is primed to increase – as the Bank of England has indicated will happen in May – tracker mortgages are affected. Taking the same example, a jump from 0.5% to 1% would make that +2.7% deal work out at an interest rate of 3.7%. By following the activities of the BoE, you can predict when and for how long a rate increase or decrease will occur. It’s often better to take out a tracker mortgage when the base rate is primed to drop.
Bear in mind also that the LTV (Loan-to-Value) ratio will affect the rate you’re granted. Low LTVs, which mean the bank is giving you less of a proportionate loan for the purchase, lead to better tracker mortgages.
What other mortgages are there?
The main thing to consider regarding tracker mortgages is that the payments will eventually get bigger or smaller each month, depending on how the base rate is fluctuating. This can make it a little bit more difficult to budget for the investment over time.
You may want to consider a fixed-rate mortgage – something that comes out of your account, steadily, for two to ten years at the same price. Normally you can be charged an ERC (Early Repayment Charge) if you leave before the contract expires.
Another option is an SVR, which rises and falls like the tracker, but doesn’t rely on the BoE’s suggestions. Essentially, lenders can charge whatever they like. They will keep rates low at certain points to stay competitive, yet an SVR is what most banks want to pull you into, since they can have the highest peaks in return percentages.
In addition to further products, either of the above mortgage types may be more attractive than a tracker mortgage – especially considering the end of the Term Funding Scheme that kept the base rate at a historic limit. We can help guide you through your remortgage process identifying the best products for you to meet your objectives. From raising capital to securing the best rate, use Liquid Expat Mortgages for any and all comparisons, specialised for overseas investors.