Long-term mortgages: Keep repayments on track

Negotiate your way through the mortgage maze with a simple tracker loan
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The Independent Online

Anyone buying a house with a mortgage faces a bewildering choice. According to Moneyfacts, the financial information service, there are 273 tracker mortgages alone on offer.

The number is not so surprising, given that a number of lenders have changed their variable rate mortgages in recent years so they track the Bank of England's base rate. This makes trackers some of the simplest home loans, as the interest charged moves with base rates, not because of an individual lender's policy.

Many tracker mortgages are not so straightforward, however. Many are effectively discount mortgages, charging less than the lender's standard variable rate for a number of years.

This usually goes hand in hand with redemption penalties during the discount period. Once this is over, some trackers move not to a higher tracking rate but to the lender's standard variable rate (SVR), which are rarely good value.

But some lenders now use"lifetime" trackers. The mortgage is priced at a set margin over the Bank's base rate from the outset, and this margin applies until the loan is paid off.

The Woolwich, Barclays Bank's mortgage arm, now usesthese. It offers a mortgage at just 0.19 per cent over base rate, making for a rate of 4.69 per cent.

Abbey's margin is 0.75 per cent - or an effective rate of 5.25 per cent - although its deal does come with a six-month initial discount and the facility to offset savings against the mortgage for a lower, overall interest bill.

This may suit some, but The Woolwich is confident that the simplicity of its deal, and its very low interest rate, will attract home buyers, and persuade them to stay with the lender. To this end, The Woolwich charges no arrangement fee for its tracker mortgage, and it has no redemption penalties.

The next best lifetime trackers, from Hinckley and Rugby Building Society and Coventry Building Society, charge £499 and £549 respectively. And the lack of penalties allows a switch to a fixed or capped rate mortgage, should interest rates go up. But its arrangement does have limitations, chiefly that the 4.69 per cent rate is only on offer to borrowers who have at least a 25 per cent deposit.

For loans up to 90 per cent the rate rises to 4.99 per cent, and for 95 per cent, 5.29 per cent.

The Woolwich lifetime tracker does have some flexible features, such as the ability to make overpayments, draw down additional funds or take a payment holiday. But it charges its standard variable rate - currently 6.59 per cent - for additional borrowing. This even applies to money built up through overpayments.

Despite the attractive basic mortgage rate for The Woolwich's tracker, it might not suit everyone, especially those who plan to use its flexibility. A loan with a higher basic interest rate could still be better value.

The loan is also only available on the Internet. This permits The Woolwich to offer the loan on such thin margins, but it could put off those who would prefer more personal advice.

"Whether this deal is enough to have home buyers queueing up at their PCs remains to be seen," says Moneyfacts spokesman Andrew Haggar.

Instead, the lifetime tracker should appeal to someone who is financially quite sophisticated, is comfortable managing their affairs online, has a large deposit and is more interested in long-term value than the immediate cost. It should also attract buyers who think anything more than modest interest rates are unlikely, and so do not feel the need for a fixed rate loan, and those who plan to make large and regular overpayments, for example from bonus income.

"This is designed for the sophisticated borrower who is looking for value over the long term," says Mark Chiltern, chief executive of Purely Mortgages, the broker. "It should appeal to borrowers who do not want to constantly chase down the lowest interest rate."

And if other lenders copy The Woolwich's emphasis on transparency and simplicity, all home buyers will stand to benefit.

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