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Complete Guide to Mortgages |
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BASE RATE Tracker Mortgages
Lenders have the
right to change their standard variable rate (SVR)
regardless of changes to the Bank of England base rate,
although most broadly follow it. Base rate tracker
mortgages bypass this by mirroring exactly any changes to
the base rate, whereas normal variable rate mortgages
follow the SVR. Interest is charged at a set percentage -
typically between 1% and 2% - above the base rate and
remains constant for the duration of the mortgage or until
you switch product or lender. Unlike most other mortgages,
trackers will not revert to the SVR at any point during
the life of the loan, unless it is stated the tracker will
only run for a set period at the outset.
Types
of tracker:
Trackers offer some security as the rate is
guaranteed never to exceed the base rate by more than a
fixed margin. But payments probably will fluctuate over
time so they may not be suited to those on a strict
budget.
As with standard rates, however, tracker rates can be
fixed, discounted, stepped, flexible, capped and so on, so
are adaptable to individual needs. The rate simply follows
the base rate rather than the SVR as it would with a
standard mortgage. For example:
Fixed
Tracker: The rate will be fixed for a period of
time between one and five years, for example - then when
the initial period is over, the mortgage reverts to a
tracker, possibly for a tie-in period.
Discount
Tracker: Discounts or stepped discounts that
follow the base rate can be built into the beginning of
the mortgage term, again for a set period.
Capped
Tracker: Your mortgage rate would follow
the base rate as with a normal tracker but with the
security of a cap to prevent it from rising above a set
level.
Advantages:
With a tracker rate, you benefit instantly from
any drop in interest rates, which means you can work out
immediately what your pay rate will be as soon as the Bank
of England announces it. With your lender, you may have to
wait to see what it does and even then you may not benefit
significantly from any cuts.
The fact that your mortgage will never revert to the
lender's SVR means that you have security and the rate you
pay will always be competitive with other products.
Also, the difference between the tracker rate and the base
rate is usually a lot smaller than the margin between a
standard variable rate mortgage and the base rate. And the
lender can't change this so in some ways this is a fairer
system.
Disadvantages:
If interest rates fluctuate so too will the
amount of your repayments - and a rise in rates will
obviously see them go up. This can make budgeting
difficult and if you can't afford above a certain amount
each month you may not want to take the risk of a tracker,
unless you are certain rates will not rise significantly.
Double-check in your mortgage lender's small print that
your rate really can't rise. For example, some lenders
will guarantee that the pay rate will not rise over 1 %
above the base rate, but take a close look for opt-out
clauses stating that in `exceptional circumstances' the
lender can waive that guarantee.
It varies from lender to lender but early redemption
charges may be levied if you try to pay off your mortgage
ahead of schedule or transfer to another mortgage or
lender before the end of the initial period.
LIBOR
mortgages:
LIBOR mortgages work in exactly the same was as
base rate tracker mortgages but mirror a different
interest rate -the London Interbank Offered Rate, the rate
at which banks offer to lend money to one another in the
wholesale money markets in the City of London.
Historically, this rate has been lower than the base rate
- but, of course, past performance is no indication of
future trends.
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