Tracker mortgage with short initial rate

tepidfire100

Hey I'm looking to get a tracker mortgage for a new house purchase (borrowing 140k against a 320k) house.

I'm planning to set the duration quite long (around 30 years) to keep the monthly obligated payment low, but in reality will most likely be overpaying a lot paying it off in around 6 years (I just don't want to commit to such high payments).

Nationwide seem to come in at the best rate according to the money supermarket comparison with 1.89% for the first 5 years, then 3.99%, with fees of £999.

However if I go to the nationwide site, they have a tracker mortgage available at 1.69% for 2 years with no fees.

It seems counter intuitive to me that you would pay high fees and accept a worse rate to lock in on a tracker mortgage (I understand why you may do that on fixed). Am I missing something?

My thoughts are that the best option would be to take the really cheap 2 year tracker, then at the end of those 2 year find something similar (ideally with nationwide again).

Any thoughts? Is there a benefit of paying to lock in on a tracker I'm not seeing? Or are they hoping people just stay on the standard variable and don't bother getting a new deal?

amnblog

This is one key thing you are missing her TF.

If you are looking to set up a mortgage over a 30 year term then overpay to settle within 6 years you are likely to fall foul of early repayment charges for rapid settlement.

Many Lenders (including Nationwide) will allow you to overpay by 10% of the outstanding amount per year without penalty on their more attractive products. What you are suggesting here sounds more like 20% over payment.

20% over payment is possible with some Lenders, unlimited over payment with others.

It sounds to me like you could perhaps also consider an offset mortgage.

Either way advice from a mortgage broker is likely to be a smart idea.

tepidfire100

Thanks for your reply amnblog. One of the advantages of a Nationwide tracker is that there are no early repayment charges. From their site

You'll pay no Early Repayment Charges (ERC), allowing unlimited overpayments and penalty free switching.

Their fixed rate deals are restricted to 10% like you say.

kingstreet

You are comparing a five year tracker with a two year tracker.

You are trying to understand why apples and oranges are different.

tepidfire100

If there is no product fee (which is the case with their 2 year product), what difference does the initial duration make? It seems to me that the shorter it is, the better for less lock in.

Couldn't I just take out the exact same (assuming they keep their profit margin they add onto the boe rate the same) 2 year deal product out when the first one ends.

If that's the case, what would be the benefit of paying 1k upfront and higher rate of interest for a 5 year deal?

Thanks

kingstreet

tepidfire100 wrote: »

Couldn't I just take out the exact same (assuming they keep their profit margin they add onto the boe rate the same) 2 year deal product out when the first one ends

We don't know what will be available then.

That's why there's a five year option. The premium over BoE changes regularly.

Thrugelmir

tepidfire100 wrote: »

However if I go to the nationwide site, they have a tracker mortgage available at 1.69% for 2 years with no fees.

It seems counter intuitive to me that you would pay high fees and accept a worse rate to lock in on a tracker mortgage (I understand why you may do that on fixed). Am I missing something?

Let's assume BOE raises base rate twice in 2018 (forecasts vary between 2 to 3 rises) and twice in 2019. All increases are 25 basis points or 0.25% in laymans language.

That would result in your interest rate being 2.19% at the end of year 1 and 2.69% at the end of year 2 on your tracker mortgage.

If you decided to switch to a fix rate product at any point during the 2 year period. You may well find that rates have correspondingly increased on these products.

While the BOE influences lending rates through the movement in base rate. It doesn't directly control them. There's plenty of other factors in play that could cause rates to edge fractionally upwards. Fractions may in themselves maybe small. When you are borrowing a large sum of money. The magnification effect soon becomes significant.