First Time Buyer Mortgage-Tracker or Fixed?
The terminology is quite confusing for some people to start with, so let’s look at what these terms mean.
Fixed rate mortgages, these primarily fix the cost for a set period, normally two or five years, which means over this period the cost is guaranteed never to increase or decrease, so you know from the start what your payment will be from day one. These products are normally priced higher than other mortgage products, so when fixing a mortgage you should look at all options available. With fixed rate mortgages you would also have what they call a redemption penalty, always find out what this penalty would be if you redeemed your mortgage as these penalties can be quite high. Most products in the market place have some form of flexibility, they will normally allow you to overpay by a maximum of 10% per calendar year without a penalty, again check with your advisor of when the lenders calendar year starts and ends.
Tracker Rate Mortgages are slightly different, normally the monthly payment will be less than a fixed rate mortgage, which looks attractive to start with but when interest rates increase so will your monthly payment, these products will normally track the BBR (bank Base Rate) currently 0.5%, which has stayed at this level for the last 19 months, lenders will normally have a fixed margin above this, lets say it is 2.5% plus BBR, this means in real terms that the rate you are paying is 3%, if the Bank of England decide to increase the BBR then your monthly payment will increase by whatever the increase is. There is another tracker product called LIBOR, this is slightly different from BBR and the rate would be higher than the Bank Base Rate.
Libor stands for the interbank offered rate and is the main setter of interest in the wholesale money market. Unlike bank rate, which is set directly by the Bank of England, Libor rates are set by the demand and supply of money as banks lend to each other to balance their books on a daily basis.
So if you if you are on a LIBOR based product, the chances are that you are currently paying more than somebody on a BBR deal, also these rates will normally change on a quarterly basis, thus not giving you much notice of a change in your payments to the lender.
All the tracker rate mortgages again will have some form of redemption penalty, so look closely at the cost to redeem, especially if the mortgage you have taken out does not have the term portability, which in essence means if you where to move home, this mortgage product would have to be redeemed and a new mortgage taken out, which could cost you thousands of pounds, normally these products do have some flexibility, so check to see if you can overpay, again this would normally be 10% per calendar year.