Unlike fixed-rate mortgages, a tracker rate changes. Can you afford an increase?
Tracker mortgages track the Bank of England base rate plus a set margin. The mortgages have variable interest rates, so your payments may change over time as the Base Rate fluctuates. Our mortgage team is more than happy to help you decide if a tracker mortgage is right for you. We are very flexible and offer appointments over the phone, via video call or face to face to discuss your tracker mortgage from 08:00 - 20:00.
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The importance of affordability
For most of us, buying a home will be the biggest financial decision we’ll ever make.
When finding a mortgage product that will meet your requirements, both your income and outgoings will play a part.
The EU Mortgage Credit Directive of 2015 introduced stricter lending criteria, which led to mortgage lenders having to take greater steps to check affordability – including on remortgages.
These rules require your lender to check you can afford your repayments, both now and in the future. To do this, they will need information about your income and outgoings. You will have to inform them if you expect your income and outgoings to change in a way that means you’ll have less to spend on your mortgage repayments. You will also need to provide your mortgage lender with evidence of your income.
Before you choose a specific tracker mortgage deal, you need to decide how much you can safely pay each month and which is the most appropriate for your needs. The monthly mortgage payments on tracker mortgages can rise.
If you’re sure you can afford your monthly mortgage payments if they rise, then a tracker mortgage is probably good for you as the initial payments may be more attractive. If your note sure or you want the certainty of payments that won’t change, a fixed rate mortgage might suit you better.
A tracker mortgage will usually follow the Bank of England base rate to then set the interest rate you pay on your mortgage. So if your tracker deal is advertised as ‘Base Rate plus 0.80%’, it means your payable rate will be the current Base Rate with 0.80% added to this.
With variable mortgages, your lender is free to set its own interest rates. They can also change the interest rates they charge you at any time. Tracker mortgages are different in that they are tied to an external rate, which your lender must follow. This makes tracker mortgages often cheaper than variable mortgages, your advisor will explain this if its relevant to you.
Tracker mortgages normally follow the Bank of England’s base rate, which is the interest rate at which high street banks borrow money. The base rate tends to rise if the economy is doing well, and will fall during a recession. With tracker mortgages you will generally pay less for your mortgage during economic tough times, but your interest rates may rise when the economy starts to improve.
Tracker mortgages are usually offered on for a set period of time. If you decide to switch to another mortgage deal or pay off your mortgage early, you will probably have to pay an early repayment charge (erc).
The two most common ways of repaying your mortgage are capital repayment and interest only.
On a repayment mortgage, your monthly payments will partly go towards repaying the interest accrued on the money you’ve borrowed and partly towards repaying the capital sum (i.e. the amount you borrowed).
The benefit of capital repayment is that you’ll be able to see your outstanding mortgage reducing each year (albeit very slowly in the early years), and you are also guaranteed that your debt will be repaid at the end of the mortgage term, as long as you keep up your payments. On a capital repayment mortgage, the shorter the term you pay your mortgage over the bigger your monthly payments will be.
By having a longer term, you may benefit from a lower monthly payment, but you will also pay more interest to the lender over the mortgage term.
Capital repayment is the most common way of repaying your mortgage.
Interest Only Mortgage
For an interest only mortgage, your monthly payments will only cover the interest on your mortgage balance. The capital you owe (i.e. the amount you borrowed) will not go down and you will need to repay this in full at the end of your mortgage term. This means you will need to make a separate investment or combination of investments to generate the capital required, and you will also need to prove that you can afford to do this.
You should bear in mind that the value of investments can go down as well as up and you may not get back the original amount invested. For an interest only mortgage, the lender will need to see your plan for repaying the loan when the interest only period ends. If you fail to generate enough to repay your mortgage by the end of the mortgage term, you may be forced to sell your property.
With an interest only mortgage, you must be able to demonstrate how you will repay the capital sum at the end of the term.
It’s easy to underestimate the mortgage costs involved when buying a property.
Lenders may ask you to pay a valuation fee. The type of valuation you choose will depend on factors such as the age and condition of the property.
These are the costs your lender will charge you for arranging your mortgage. Some lenders will allow the fee to be added on to your mortgage, but this means you will be charged interest on it over the mortgage term.
The fees charged by a solicitor will include their conveyancing fee (i.e. for the transfer of land ownership), as well as charges for legal registrations and other miscellaneous costs (known as disbursements) such as local search fees and Land Registry fees. Some lenders may offer to finance some or all of your legal costs as an incentive.
If the amount you wish to borrow is greater than a specified proportion of the property’s value (typically 75%), you may incur a higher lending charge.
Lenders may charge an ERC if you make an overpayment in excess of any stated limit, if the loan is repaid early or if you remortgage during the early repayment period. This can amount to a significant cost, so you should always check the early repayment terms in the offer letter from your lender.
Lenders may charge a fee to release the deeds of a mortgaged property to you or a new lender.
Before we get started, we will explain how we will be paid for arranging your mortgage if it all.
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Your home or property may be repossessed if you do not keep up repayments on your mortgage.