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Is a tracker mortgage the right option?

It seems that there may be some better news ahead for borrowers at last. Lenders fund their mortgages from the money markets, and here rates have been dropped and economists believe that the base rate should only go up another quarter of a point to peak at 6% later this year.

If that proves to be the case, then homeowners are advised to look for a variable rate mortgage rather than fixing their rate at the top of the market. Variable options include trackers (linked to the base rate) and discounted mortgages, which offer a discount on the lender’s standard variable rate (SVR).

Ray Boulger of mortgage broker John Charcol said: “Borrowers know where they stand with a tracker as they have agreed the margin over or under the base rate at the outset. With a discount you are in the hands of the lender which could raise its SVR so much that the discount is worthless. I think base rate has peaked, so unless you need the security of knowing what your mortgage payments will be over the next few years, opt for a variable rate tracker.”

It costs a lot nowadays to switch your mortgage every two or three years, as many lenders have put their arrangement fees up to around £1,000 on average, and some are based on a percentage of the loan. That makes a tracker more attractive, especially if the track lasts for the length of the loan, and not just a short time. However, it makes sense not to be tied-in to the deal for too long, as your own and external circumstances will undoubtedly change. Lifetime trackers often have no early repayment charge, or at worst one that only covers the first few years.

Hinckley & Rugby Building Society has a lifetime tracker on offer at 0.09% over base, making the rate currently 5.84%. The arrangement fee is £645 and the exit fee is £145, but there are no legal fees for those remortgaging.
On a 25-year repayment mortgage, the monthly repayments on a £130,000 loan are £825. You can also offset your savings at the building society too, which would help to reduce payments even more.

John Charcol has made an exclusive deal with Lloyds TSB for a lifetime tracker mortgage. This is 0.17% over base rate, making it currently 5.92%, and the monthly repayments with the same example would be £831. The benefit is that there are no arrangement or exit fees, free valuation and legal costs for remortgages.

Both these mortgages come without early repayment charges, so you are able to overpay without penalty.

BM Solutions has a two-year tracker at 0.36% under base rate, which makes it currently 5.39%. Unfortunately the fees are hefty at 1% of the loan making it more attractive for smaller mortgages.

If you want to move within the term, then there is also a 5% fee, but there is no exit fee. The monthly repayments on £130,000 are £790, making the total cost including fees over the two years £20,260.

Darlington Building Society has an offer of 0.11% below base rate until September 2012. The current rate is therefore 5.64% with an arrangement fee of £574 and £100 exit fee. There is an early repayment charge of 1% until 2012, but you can overpay up to 10% of the loan free of charge. The monthly payments come to £809, making the total cost over two years, for comparison, £20,090 and £49,214 over the five-year term.

Tom Smith
28th September 2007

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