POSTED 21 September 2018 Mortgages

What is a Lifetime Tracker Mortgage

What is a lifetime tracker mortgage?

A lifetime tracker mortgage is a type of variable rate loan that can reward a borrower’s patience with convenience and cost effectiveness.

However, the unpredictable nature of interest rates means that these long-term deals do come with a risk.

Tracker mortgages

A lifetime tracker mortgage falls under the category of a variable rate loan. This means that the interest paid by a borrower goes up and down depending on a separate rate.

So how is the interest rate determined?

With a standard variable mortgage, the interest rate follows the standard variable rate of the lender. However, a tracker mortgage, follows the Bank of England base rate. Alternatively, it may follow the London InterBank Offered Rate, often referred to as the Libor rate – but this is less common.

It is important to note that the actual rate of a lifetime tracker mortgage is unlikely to be equal to that of the base rate guiding it. Instead, it will almost certainly be a rate above the stated base – for instance, the Bank of England base rate plus 2%.

The long haul

A lifetime tracker mortgage, as the name suggests, lasts the entire duration of a mortgage, so on average around 25 years. Longer-term tracker mortgages, like lifetime ones, generally have higher interest rates than the more common two-, five- or 10-year trackers.

However, they can be more cost effective in the long run because you don’t have to keep remortgaging when your deal ends, allowing you to avoid mortgage arrangement fees and other associated costs.

Moreover, if your mortgage term falls during a period of low interest rates, you could be rewarded with a very reasonable loan deal.

Before making any decision, you should strongly consider carrying out plenty of research into interest rate trends. If rates are relatively high and experts believe that they will fall, a tracker could be the right option.

Check the small print

A lifetime tracker will often include a minimum interest rate clause, known as a collar or floor. The interest you pay on your deal will not go below this stated minimum.

The purpose of this is to save a lender from making a loss on the loan in the eventuality that interest rates drop dramatically. You should check your contract to make sure that the minimum rate isn’t too high, as this could prevent you from benefitting from low base rates.

You should also ensure that your contract includes a maximum rate, known as a cap. This will save you from paying astronomical fees in the event that interest rates skyrocket. If you’re not sure a deal offered by a lender is a good one, it is best to consult an impartial financial advisor.

Bottom line

A lifetime tracker mortgage can be advantageous for those who end up paying low interest rates on their loan. However, the potential reward comes with a potential risk so you need to be in a position to cover the costs if the market doesn’t go quite as expected.