For home buyers who want a mortgage that will precisely reflect changes in base rates, a tracker mortgage will be ideal.
What is a Tracker Mortgage?
Tracker mortgages are a type of variable rate mortgage, which means that the monthly payment of the interest rate is based on the movement of the Bank of England base rate. However, unlike standard variable rate mortgages, in which the lender still determines this rate, tracker mortgage rates quite literally track this base rate. These types of mortgages are very appealing to a lot of home buyers as monthly payments can be greatly reduced, though they do not come without their risks.
Tracker Mortgages Explained
With tracker rate mortgages, mortgage lenders can set their products to track below the Bank of England base rate, or more commonly, above it. In this latter case each lender sets a percentage above the base rate which works out as interest amount to be paid by the borrower each month. Therefore, if any movement in the base rate occurs, the monthly interest payment will also change because the tracker mortgage rate moves simultaneously with the base rate amount.
Usually, a tracker mortgage is for an introductory term only as these are among the lowest mortgage interest rates available. These tracker rates usually last between two to five years, with the shorter term trackers generally carrying more incentives. It is considered that the shorter the tracker mortgage term chosen, the lower the interest rate that will have to be paid.
However, when tracker mortgages do come to the end of their introductory term, it is likely that the mortgage will move to a higher tracker rate, or a lender’s standard variable rate, in which the monthly payments may suddenly jump depending on the current base rate.
Lifetime Tracker Mortgages
Therefore, if the borrower doesn’t want to worry about coming to the end of the introductory period of their tracker rate mortgage, thus having to switch to another mortgage deal, if interest rates are low lifetime tracker mortgages may be a more suitable option. These mortgages will last for as long as the entire term of a mortgage, and are becoming more attractive to potential homeowners. Although they may initially appear to be more expensive at the beginning of the term, having a lifetime tracker mortgage will not involve any additional mortgage fees or hassle of remortgaging, so could be cheaper long-term.
Advantages of Tracker Mortgages
A base rate tracker mortgage can have many benefits: not only will payments be low provided that interest rates are low, but if the borrower wishes to make an early re-payment the charges should be less expensive in comparison with fixed mortgage rates.
Disadvantages of Tracker Mortgages
Nevertheless, there is an equal chance that the tracker mortgage rate may increase, which could create a substantial increase to the monthly payments unless a good tracker mortgage deal has been found.
Finding Tracker Mortgage Deals
It is worth persevering when selecting mortgage loans, as the best tracker mortgage deals may not always be with the biggest mortgage providers. Indeed, cheap tracker mortgages can be obtained by using comparison sites to source the best offers around and compare tracker mortgages from various lenders.