Now that the Bank of England has reduced interest rates to their lowest since 1694, we are seeing the return of caps on tracker mortgages.
The aim of this is to protect us from possible higher interest rates in the future, but are they a good mortgage option right now?
Until recently, many mortgage lenders had put “collars” on their tracker mortgage deals to stop payable rates getting too low.
Now mortgage providers are looking to cap their rates in order to protect customers. This strategy is also designed to attract new mortgage customers looking for security in a very turbulent and uncertain market.
Woolwich capped mortgage offers
Woolwich is offering a lifetime tracker of Bank Rate + 2.99%, which is capped at 5.99%.
They also offer an offset tracker mortgage with a rate of Base Rate + 3.09% capped at 6.09%.
Both of these mortgages are capped for their first 3 years, meaning that should the Bank Rate fall so will the tracker’s interest rate. In in the event the Bank Rate goes over 3%, your rate will not exceed the capped rate.
Emma Austin of Woolwich said:
‘Base rates are so low at the moment but we don’t know where rates might be in the next year or beyond, and that may cause some nervousness about customers committing to a tracker. We have this week introduced a cap on both the lifetime and offset tracker mortgages so customers can be certain that any changes to base rate above 3pc will not affect their mortgage rate.’
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Coventry Building Society offers
Coventry Building Society has also introduced a residential 3 year capped tracker mortgage at Bank Rate + 2.99%, capped at a maximum of 4.99% until the end of June 2012. The rate is only available to those of you with a 25% deposit or more.
There is also a buy-to-let mortgage option capped at 5.49%.
A positive of the capped tracker mortgage is that it is a bit of a hybrid option that could well suit some of you looking to borrow in the current economic climate.
The flipside is that there are cheaper tracker mortgages and lower fixed rate mortgages available. What isn’t in doubt, is that it’s a great way to hedge your bets in the uncertain rate environment we find ourselves in.
So, is the return of the capped tracker mortgage merely one that offers short term security?
Or is it a viable long term solution that protects you against big interest rate rises?
(Assuming that ever happens!)
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Read: Overpaying mortgages is back in fashion
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March 9th, 2009 at 9:23 am
It will be interesting to see what does happen with rates over the next year or so.
March 9th, 2009 at 4:25 pm
Hi,
we have a tracker mortgage, of around £50k. We already pay double the required monthly repayments each month. Since the last % interest rate cut, this means even more is being payed off the balance outstanding.
I would like to know if it would be in our interest to pay more , while the interest rates are so low.
We dont have any penalty clauses in the mortgage agreement for doing so.
My reason of thinking about doing this is that we would not benifit by saving the money , due to the interest rates.
My bank has advised us to speak to an independant advisor about it, I thought someone on here may have some advise?? Thanks.
March 9th, 2009 at 11:06 pm
Simple answer is does saving generate an income (after tax) of more than the cost of borrowing?
If my mortgage interest rate is 0.67% but I can save at 3% gross or 2.4% net (for basic rate tax payer) then it is a no brainer – pay the minimum off the mortgage (e.g. no overpayments or interest only), save any overpayment you can and you profit 1.73% a year on the amount you would have overpaid while using the bank’s money! Just ensure wherever you put the capital is not riskier than you are comfortable with (see FSCS limits). You could use higher risk tracker funds, etfs, or pure equities to make far more than 3% but this is higher risk (you could lose money) and you should talk to an IFA about this risk and your personal circumstances.
March 10th, 2009 at 10:25 am
brenda it does seem like you’re doing the right thing, getting rid of the debt at a faster rate rather than saving the cash. however, i do have one Q about paying more on the mortgage: do you have adequate pensions & savings? If not, although cash savings rates are low, you can still get some good deals on small sums (3-5% for a year on some offers) and what’s more, since stocks and shares have gone so low, some might say it’s a good time to put money in… Independent adviser definitely a good bet