When you buy a residential property – either to live in or let – with the help of a mortgage, you’ll have a number of product options to explore. Typically, a mortgage deal will consist of a lower interest rate for an agreed initial period, before moving you on to another plan once this period comes to an end.
This process forms the crux of the Standard Variable Rate (SVR) and tracker mortgage split. Unfortunately, a lot of people confuse the two – but they are not the same. So it pays to be knowledgeable about what a lender is offering from the outset.
Let Liquid Expat Mortgages explain how both of these percentage agreements work…
Whilst the process of purchasing a property in the UK is simpler than elsewhere in the world, UK mortgage rates are linked to the Bank of England (BoE) base rate. It assesses the country’s economic performance and raises or lowers the percentage accordingly. Lenders don’t have to match this figure exactly – it’s more of a guideline. In a nutshell, a tracker mortgage is a deal that follows the ups and downs of the British economy.
So, for instance, the BoE rate might be 1%. A lender might decide to offer a +2.5% tracker loan which totals the rate to 3.5%, i.e. the tracked rate (1%) plus 2.5% on top. In recent years these have been more favourable than other mortgage products, due to the current base rate being so low (0.5%). But, with forecasters predicting a base rate change in May 2018, it may pay to switch.
If you do proceed with a tracker mortgage, note that the product will likely have an expiration date on the enticing deal. A two-year tracker mortgage, for example, will only track for two years – at the end of this term, your rate will change.
Tracker agreements are useful because they let you know, with minimal worry, how much you’re expected to pay for a certain period of time. All you have to do is follow the BoE base rate. Yet it’s common practice for such deals to end, replaced by an SVR after a certain length of time.
Standard Variable Rates are, basically, home loan interest rates set by the lender. Obviously, they have to stay competitive, meaning rates can’t climb far above the norm. But there’s a greater chance you’ll be subject to an increase at short notice. The rate is not fixed; it will fluctuate with the lender’s commercial strategy.
Other differences to consider
To recap so far, let’s remind you of the tracker/SVR switchover:
- A mortgage is approved at a tracker rate, whereby your payments follow the (generally) lower base rate set by the BoE.
- In two to five years, the tracker will finish. You’ll be switched to the SVR rate or another variable mortgage.
- Repayments will start to rely on what the lender charges, instead of wider economic factors. Unlike the tracker agreement, you probably won’t be charged an early leaving fee if you want to remortgage or pay back the full debt much sooner than you thought.
The final thing to bear in mind is what ‘interest only’ and ‘capital repayment’ mortgages mean. The former lets you pay on just the interest amount, not the property itself. You’ll be forking out a low sum of money every month that only covers the debt, paying for the home in one lump sum when the mortgage runs out.
The second option is often preferable – your monthly payments will likely be higher than an interest-only mortgage, yet they fulfil the debt obligation and the price of the property at the same time. Steadily you’ll be covering the net investment charges, piece by piece. Both SVR and tracker mortgages can take the form of either repayment method. The trick is knowing what’s best for you.
Seeking further advice and support with your mortgage application? Our specialist brokers will unveil which lenders suit your individual circumstances. Enquire today to request a free quote from our experts.