Pay 2.39% on a stress-free mortgage

With uncertainty over base rate and the economy, these stress-free mortgages ensure you have all your bases covered.

There was yet more bad news for the property market this week, with Nationwide Building Society, one of the nation’s biggest lenders, warning that we should expect further house price falls in the coming months.

It argued that a dramatic increase in the number of properties available to buy, combined with borrower uncertainty following the Government spending cuts, would lead to a downward movement in prices - albeit not at quite the horrifying levels of 2008.

It’s becoming ever more apparent to me that the resurgence in confidence in the housing market from the middle of 2009 onwards was just a temporary measure. Personally, I think that there’s plenty more unpleasantness to come.

Seeking stability

Well, I say unpleasantness but it is, of course, great news for potential homeowners waiting for a bargain. For those of us already on the ladder, it can be the cause of great worry. If house prices are falling, how near are you to ending up in negative equity? OK, so it's not the end of the world, as I explain in Don't be panicked by negative equity! but it's certainly not ideal.

And if you lose your job, or interest rates start to rise (as they will at some point) how quickly will your mortgage become unaffordable?

That’s why fixed rate mortgages are starting to look more attractive?.

The rise of the fixed rate

I’ve been banging on for what feels like a lifetime now about how sensible a move it is to fix, and fix for the long-term, while fixed rates are at historically low levels. And at least some borrowers appear to agree with me. According to the John Charcol mortgage monitor, just shy of 30% of all mortgages taken out in November were on a fixed rate basis, compared to a low of just 15.8% in March.

Now, that’s still a pretty small proportion historically, but there’s certainly a movement towards the mortgages that offer you certainty over the size of your repayments. It’s no wonder First Direct has suggested 2011 may be the year of the fixed mortgage.

Taking advantage of low base rate

Despite all that, I still reckon that for some borrowers it’s worth making the most of the record low base rate, and going for a variable rate mortgage.

Nationwide reckons that base rate will be kept low, possibly still at 0.5%, until late 2011. So there could still be plenty of time in which to take advantage of really low mortgage rates with a tracker deal.

The trouble is that if you sign up for a two or three-year tracker mortgage, and base rate actually rises far higher and faster than expected, you face a problem. Sure, your mortgage repayments are becoming more and more expensive, but it will cost you to get out of that deal – you’ll probably have to hand over an Early Repayment Charge of a couple of percent of your mortgage advance, a figure that can come to thousands and thousands of pounds.

Thankfully there is a type of mortgage that takes advantage of low base rate, but offers an inexpensive escape route if things don’t go according to plan, making it the ultimate stress-free mortgage in my view.

The stress-free mortgage

With a term tracker mortgage (occasionally called a lifetime tracker) your mortgage tracks the bank base rate for the entire life of the mortgage, rather than over a two or three year period as it does with a typical tracker.

So if bank base rate takes even longer to start to head north – five years, say – then you still enjoy the full benefit of a great rate without needing to remortgage to a new tracker halfway through, and pay the fees associated with remortgaging.

And if things go horribly wrong, and base rate instead rockets northwards at a rate of knots, you don’t have to worry about your exit route, as the vast majority of term trackers do not charge an Early Repayment Charge at all. So you can quickly remortgage to the safety of a fixed rate mortgage without having to shell out a small fortune in penalty charges.

So whatever happens, you’re covered. That sounds to me like a term tracker is a real stress-free mortgage!

14 tremendous term trackers

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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.