Tracker Mortgage May be a Bargin

by Mark Johnston

Interest in tracker mortgages is on the increase since the Bank of England governor, Mervyn King announced that interest rates are likely to remain low until the end of 2011.

The Bank of England base rate has been at its an historic low of 0.5% for some time now making trackers mortgages the best deals for borrowers. Although fixed rate mortgages give borrowers peace of mind my setting monthly repayments, they are still expensive when compared to loans that track the base rate.

Leek building society are offering one of the lowest three year tracker mortgages at 2.49%. Borrowers need at least 25% deposit or equity in their homes and have to pay a £995 arrangement fee. The loan tracks the base current 0.5% base rate by 1.99% giving a great deal for those looking for this type of mortgage.

In comparison, the best 3 year fixed rate mortgage on the market is a 3.49% deal with a £995 arrangement fee. That’s a whole 1% more than the tracker mortgage although the rate is guaranteed now to change in the next 3 years where as the tracker would increase in line with any base rate changes.

A researcher for the data company, Defaqto, pointed out that the margins have grown for tracker mortgages in terms of the amount of profit that banks makes but they still remain very attractive because of the low base rate.

Tracker mortgages in the UK are variable rate mortgages that track the bank of England bas rate. If the rate goes up, the mortgage rate is increased, the same would happen in the base rate decreased.

A good example of this would be if a tracker mortgage is set at 1% above base rate. With the current Bank of England base rate being 0.5%, borrowers would pay expect to pay 1.5% (0.5%+1%) for the mortgage. If the base rate increased 25 points to 0.75%, the tracker mortgage would also increase from 1.5% to 1.75% which would be the new base rate plus the 1%.

Tracker mortgages are usually taken out for a fixed term, the amount that the mortgage tracks the base rate will not change. A 3 year tracker, in our example would track the base rate by 1% for the full three years after which the mortgage would usually revert back to the banks standard variable rate (SVR).

Back in September 2007 the base rate was 5.75%, Cheltenham & Gloucester offered a two year tracker mortgage at 1% below the base rate. At the time borrowers would pay 4.75% (5.75% base rate minus 1%). When the base rate reduced down to 0.5% borrowers interest rates dropped below zero resulting in no interest being charged for their mortgage.

Those looking for a best buy might want to look at Natwests 2 year tracker mortgage at 2.19%. the loan tracks the base rate by 1.69% for the next two years and is available to anyone with a 40% deposit.



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