A Guide to Mortgages Part 4

by Mark Johnston

Mortgage lenders can charge interest in a variety of different ways and these are the final.

The tracker rate mortgage:

Most lenders offer this type of rate as they are by far the easiest to understand.

This is very similar to a variable rate mortgage, but it tracks the bank of England’s base rate or the London Interbank Offered Rate (LIBOR) base rate (whether they rise or fall).

Therefore if the general interest rate is cut the borrower will benefit from paying less, irrespective of whether the lender decides to drop their mortgage rate. However in the same breath if the interest rates were to rise so too would the borrower’s monthly repayments.

For example:

If the tracker mortgage is set at 1% above the bank of England’s base rate for 5 years and the base rate is currently 4.75%, the borrowers pay rate would work out at 5.75%.

The tracker rate mortgage is available for a fixed period or for the life time of the loan. The most common tracker rate period is 2 years, though many lenders are now offering 3 year, 5 year and even 10 year tracker rate mortgages.

Budgeting for borrowers with a tracker rate mortgage may be difficult as the interest rate may vary often.

An application fee is usually incurred with this type of mortgage and this can be as much as £1,000.

The offset mortgage:

With approximately 249 offset mortgage products on the market at the moment, the offset mortgage is certainly growing. Although many people still find it hard to see the potential benefits they can offer.

Offset mortgages can seem quite complex, but they simply mean the mortgage works for the borrower rather than the other way around.

This is a way of borrowers managing their money and mortgage using their current account or savings account or both.

Borrowers can ‘offset’ the credit balance they have in their current and savings accounts against their mortgage balance and then pay interest on the difference only.

Thus meaning borrowers could potentially reduce the total amount of interest paid on the mortgage.

An example of an offset mortgage would be:

If a borrower has a £150,000 mortgage and £30,000 in savings, by linking them together in an offset mortgage, interest is then only paid on £120,000 of the mortgage.

When offsetting credit balances against a mortgage the borrower has two options:

–          keep the mortgage repayments as they are and therefore pay the mortgage off quicker

–          keep the original term and reduce the monthly repayments

However if a borrower chooses this option they must remember that they will not earn interest on their credit balances.

This type of mortgage only really works if a potential borrower has substantial savings to offset or if they get a regular bonus from their employment.

At the end of all this all interest rates have something good and bad to offer, but a mortgage specialist can help a borrower to decide on which rate is best for their individual circumstances and needs based on their personal and financial situations.

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