There are various types of arrangement to govern the interest that is payable on a mortgage and one of the most popular of these, especially over recent years when interest rates have been low, is the tracker mortgage. In this article we will look at how the basic tracker mortgage works, describe the types of tracker mortgage that are presently being offered by mortgage lenders and highlight some of the benefits of this type of arrangement.
What is a Tracker Mortgage?
There are two basic types of mortgage. The first, a fixed rate mortgage, sets a fixed interest rate for either a part or the whole term of the mortgage. This provides a degree of certainty as to the amount of the monthly interest payments, which is considered to be its main attraction. Its main disadvantage is that if the mortgage is taken out when interest rates are high, they will remain the same even if interest rates fall.
The second type of mortgage, a variable rate mortgage, provides for the interest rate applicable to fall or rise. In one type of variable rate mortgage, the standard variable rate, the variation in the payments will be subject to the rates set by the lender from time to time.
A tracker mortgage is a particular form of variable mortgage where the interest rate follows (or tracks) the base rate of the Bank of England. This means that when the base rate is low, the interest payments on the mortgage are correspondingly low. When the base rate rises, the mortgage interest payments will also rise.
Types of Tracker Mortgage
There are two main types of tracker mortgage. In the first type, the arrangement remains in place for the entire period of the mortgage loan. This means that the interest rate will be determined by the fluctuations in the Bank of England Base Rate for many years. Whilst this may prove to be an excellent arrangement when the interest rates remain low, as they presently are, because of the length of most mortgages it does risk significant interest rises if market forces change. An alternative to the full term tracker mortgage is one which is linked to Bank of England base rate for a fixed period of one to five years. This type of arrangement will come to an end after the fixed tracking period after which, in most cases, the mortgage will transfer to a standard variable rate mortgage.
Benefits and Disadvantages of a Tracker Mortgage
Undoubtedly, the greatest benefit of a tracker mortgage is that it can offer extremely low repayments when interest rates are low. This can enable a borrower to repay the mortgage sooner than might have been possible with a fixed rate mortgage. The main disadvantage of a tracker mortgage is lack of certainty. A borrower who is on a tight budget might struggle to meet an increase in the interest payments consistent with a rise in the base rate or to meet the lender’s standard variable rate on the expiry of the tracker’s fixed term. It is always prudent, therefore, to take advice as to the most suitable mortgage for your personal circumstances before making what is a very substantial financial commitment.
As everyone’s financial circumstances are completely different, to find out which mortgage is best for you call our experienced mortgage brokers who work in and around Worcester to get tailored advice.