How do Tracker and Discounted rates work?
Both tracker and discounted rates are variable and subject to change which would impact the mortgage payments. So, although the rates look attractive it’s important to consider what could happen if they increase, rather than just hoping they will reduce.
Understanding Tracker Rates:
The lender specifies the amount above the bank of England base rate. Any increase is determined by the Bank of England increasing or reducing the base rate. For example, 1.3% above the base rate, so if the base rate is 3% your interest rate is 4.3%. This can increase or decrease so if the base rate fell to 2.5% your interest rate would be 3.8%.
This means your monthly payments could fluctuate when you are on a tracker deal. This could be for a short term of 2 years up to lifetime trackers which would last for the duration of the mortgage.
Some lenders offer a deal with no penalty to change onto a new deal, while others may charge a reduced penalty compared to those on a fixed rate.
Some deals have a ‘floor’ or ‘collar’ rate which means the interest you pay won’t fall below this. For example, if you have a tracker of 1.3% above the base rate with a floor of 1.7% even if the base rate fell to 0.25% the lowest rate you would see is 1.7%.
Most importantly, make sure you can afford an increase in rates and the monthly payments that go with it. If the answer is no, then it’s likely a tracker deal is not the best option for you.
A tracker deal holds more risk than a fixed rate, as you cannot predict what future rates will be.
Everybody’s circumstances will be different, just because your friend has a tracker rate doesn’t mean it’s right for you, let us give you the figures and advice based on your circumstances.
Understanding Discounted Rates:
These rates are as the name suggests, a discount on a lender’s Standard variable rate, with the amount of the discount being set by the lender.
The mortgage lender can change this at any time. For example, a lender with an SVR of 6.5% offering a discount of 2% would give you an interest rate of 4.5%. This is variable so you do need to budget for any increases. For example, if a lender increases their SVR to 8% then your interest rate would increase to 6%.
These deals usually have a collar or floor rate which stops them from reducing past a set level.
Some lenders will have lower early repayment charges for discounted rates.
Not all lenders offer this option so the choice may be more limited than a fixed deal or a tracker rate depending on your circumstances.
With both tracker and discounted rate options, it’s really important to speak with a mortgage broker and look at your monthly budget to compare all options available to you, it could be for some people that a fixed rate over a different term would give you a more stable monthly payment.
Why not make a short 15-minute phone call to our freephone mortgage helpline to get started? All you need to do is phone us directly on 0333 005 0333, or text ADVICE to 82228.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
Approved by the Openwork Partnership on 31/01/2023
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