The perfect tracker mortgage

The lifetime tracker allows you to take advantage of low interest rates for the long term.

I’d like to start today’s article with a confession: I was completely wrong.

For two years now I’ve been worried about base rate rising, warning that gambling on a variable mortgage was a risk I wouldn’t fancy taking, and highlighting the safe and comely charms of the humble fixed rate mortgage.

Now, I still think I’m right about fixed rates – for borrowers like me, who like some certainty in their lives, they still represent a sensible and appealing option. But I was utterly wrong about base rate rising. Indeed, not only does it not look like rising anytime soon, there has even been serious talk of it falling even further...

A new record low?

The minutes from the latest meeting of the Bank of England’s Monetary Policy Committee - the body that decides bank base rate – have revealed there was a discussion about reducing base rate further from its current record low of 0.5% to 0.25%.

The body talked of the need to do something to kickstart a recovery in the economy, after noting a “marked deterioration” in the economic outlook. In the end, it decided against either a cut in base rate, or a new round of quantitative easing, but the subject will undoubtedly be on the agenda for the foreseeable future unless things pick up significantly.

All of this makes it even more unlikely that base rate will rise in the near future, and that when it does begin to rise, chances are it only be at a slow and steady rate.

And that just makes tracker mortgages even more attractive.

Keep on tracking

That said, I’m not such a big fan of short-term tracker deals, where your rate only follows base rate plus a specified percentage for a couple of years. I don’t really like them for a couple of reasons.

Firstly, your exciting low rate is only secured for a couple of years – two years down the line you’ll have to look at remortgaging, as you’ll have moved onto your lender’s SVR. That means spending time finding a new deal, and forking out on another product fee. With the average fee in the £1,000 region, it’s not a cheap move.

Another reason I don’t like two or three-year trackers is that if I’m wrong – again – and base rate does rise quicker than expected, then getting out of the mortgage could cost you big. That’s because you’ll need to shell out on Early Repayment Charges, which can come to many thousands of pounds.

No, if I were ever to go with a variable mortgage, it wouldn’t be on a two- or three- year tracker.

A lifetime of tracking

Instead, I much prefer lifetime trackers (also known as term trackers). These don’t just follow base rate plus a set percentage for a couple of years – they track at that rate for the entire lifetime of the mortgage!

So if base rate really does stay low for years to come, these are the mortgages you want to have, as you’ll be able to ride that wave without having to worry about shopping around for a new deal or shelling out on product fee after product fee every couple of years.

Even better, should base rate rise rapidly, making your mortgage unaffordable, it won’t cost you a fortune to move over to the safety of a fixed rate mortgage, as most lifetime trackers do not have early repayment charges!

Paying a premium

You will have to pay a slightly higher rate for a lifetime tracker, though in the long run I reckon it probably works out worth it, for the flexibility it will offer you.

Let’s look at an example. I really like the First Direct term tracker for borrowers with a 35% deposit, because it not only offers a good rate (base rate plus 2.09%, so currently 2.59%), but a really small product fee too at just £499.

By comparison, the best two-year tracker for borrowers with a similar deposit comes from Chelsea Building Society, charging just 1.99% (base rate plus 1.49%), though with a fee of a whopping £1,495.

With the First Direct deal, your monthly repayments on a 25-year, £150,000 mortgage will be £685.45, compared to £639.50 on the Chelsea mortgage. Taking the product fees into account, over the initial two years you’ll be looking at an outlay of £16,949.80 on the First Direct deal and £16,843 on the Chelsea deal, so you’ll be about £105 better off with the Chelsea deal.

But you’ll then need to remortgage to avoid a repayment shock, and in all likelihood a new competitive deal will cost you a fair bit more than £105! If base rate stays low for the next ten years, and you keep moving from two-year tracker to two-year tracker, just think how much cash you would be throwing away on product fees, when you could have settled on a lifetime tracker instead!

15 impressive lifetime trackers

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.

More: The property market is not dead | 2,557 mortgages: how to pick the one for you