For the majority of individuals climbing onto or moving up the property ladder, a mortgage is the typical form of finance. A mortgage is a financial product whereby a bank or building society lends the individual the money to buy the house, with the individual paying it back in monthly installments at a certain interest rate, which may vary. A lifetime tracker is one type of mortgage with its own benefits.
What is a Lifetime Tracker?
A lifetime tracker mortgage links its interest rate to the Bank of England base rate of interest for the full-term of the loan, which is usually between 20 and 30 years. Usually, the interest rate is fixed at a certain percentage above or below the base rate. So, if the terms of your tracker are set at 0.2 per cent above the base rate, the interest rate on the mortgage will always be 0.2 per cent higher the Bank of England’s rate, however much it may change. As an example, if the base rate is 4 percent, you will pay interest of 4.2 percent on the mortgage.
The main benefit of the lifetime tracker mortgage is that when the Bank of England base rate is low, the repayments on the loan will also be low. At the time of publication, amidst the global economic crisis, the base rate has remained very low for more than two years, meaning homeowners with lifetime trackers have benefited from low monthly repayments. Low interest rates can mean homeowners can use any extra cash to over-pay their mortgage, reducing the debt and the length of time it will take to pay back.
Lifetime tracker mortgages tend to have lower application and administration fees – because the rate is set automatically, the admininstration for the tracker is less complicated and requires fewer man hours. This is similar to investment products that track the rise and fall of a particular stock market, which also have low fees compared to other investment vehicles.
While homeowners who have a lifetime tracker mortgage benefit from low monthly repayments when the base rate is low, the opposite is the case when it rises. This means that a lifetime tracker mortgage is likely to have varying monthly repayment amounts, which may not be suitable for those on a low fixed income. Also, because the mortgage is sold as a product with fixed terms and conditions for the lifetime of the loan, changing from this type of mortgage to an alternative part way through the duration of the loan will typically entail a high exit fee.