Why I think the terrific term tracker is the best mortgage

This brilliant mortgage that makes the most of low Base Rate, but lets you leave cheaply when rates rise - I think it's the best mortgage you can get!

Have you ever done that thing on holiday where you ask other people what they paid?

How wonderful it is to learn that your last minute deal cost half what that couple from Taunton paid. But how frustrating to find out you paid over the odds for your hols compared to the family in the apartment next door -- and they got two free child places!

We all love to get a bargain. Savvy people, like users of lovemoney.com, know that a few minutes spent finding the right deal -- whether on your savings, utilities or your annual holiday -- can pay dividends.

So when it comes to our biggest financial commitment, our mortgage, we really need to get it right. The savings you can potentially make by choosing the right mortgage are, frankly, huge.

But surely you just search the market, using a clever comparison tool like lovemoney.com’s innovative mortgage search, and choose the cheapest deal that fits your income and deposit criteria? Simple.

Unfortunately it isn’t that simple, because some mortgage rates move.

Ups and downs

Variable mortgages -- which include standard variable rates, discounted variable rates, capped rates, term trackers and discounted trackers -- move up and down in line with Base Rate. They either mirror Base Rate directly, or they indirectly chase it up and down. This means that they currently have the potential to rise significantly because the Bank Base Rate is at a record low of 0.5%.

But they are actually the cheapest priced deals on the market right now.

Fixed rates on the other hand allow you to lock into a set rate for an agreed period after which you will revert to your lender’s standard variable rate. They offer protection from future rate increases which make them very appealing, but they are pricier than tracker deals.

So you can opt for cheap payments now with the risk they will rise, or lock into a higher rate and know your rate won’t go up for an agreed period.

Tracker now, fix later?

The most obvious choice is to take a low tracker now and move to a fixed rate if things start to get a bit hairy and rates begin to rise, isn’t it?

Again, it’s not that simple. Lenders make it harder by adding Early Repayment Charges (ERCs) to many trackers.

Take a two-year tracker for example and you will have to pay ERCs if you switch to a new mortgage within the first two years -- and they could total anything up to 4% of your outstanding balance, probably offsetting the savings you could make from switching.

But there is an answer.

Term trackers follow the Bank of England Base Rate at a set margin for the life of your mortgage. So you might pay Base Rate plus 3% for example and this will always be the case until you pay off the loan.

You still have the risk of rising rates of course, but these products don’t usually come with ERCs, so you can switch out of them at any time. If you want a fixed rate in 18 months, you can switch to one without steep penalties. (It’s worth noting that Woolwich is the exception - its term trackers do charge ERCs for the first two or three years, but the vast majority of other deals are ERC-free.)

Even better, if rates stay low for another five years your rate will still track at the same margin, unlike two-year trackers which usually revert to a higher rate after the initial two years.

These deals are the ‘have your cake and eat it’ mortgages that allow you to take advantage of low repayments now with the ability to switch into a fixed rate mortgage if you need to, without penalty. But remember fixed rates could also rise in the future.

• Watch this video: Sort out your mortgage online!

So, what’s the catch?

There isn’t one, although average term trackers tend to be just slightly more expensive than two-year deals.

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On a £150,000 mortgage you would pay £444 more with the term tracker over the first two years (including monthly repayments and the arrangement fee). While not insubstantial it could be worth paying for the flexibility of being able to switch into a fixed rate if interest rates rocket. It’s certainly going to be significantly cheaper than any ERCs that apply to your two-year tracker.

If rates stay low a two-year tracker will revert to a new (probably higher) rate after the 24th month, while your term tracker will remain at 3.81%.

And remember, these are the averages. There are plenty of best buy term trackers available at less than 3%, and a handful at sub-2.5%.

The table below shows my favourites based on rate and fee:

14 fabulous term trackers

* For loans over £250,000 the maximum LTV drops to 70%

• Adopt this goal: Cut your mortgage costs and pay off your mortgage early

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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 4045 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 will revert to the lender's standard variable 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.