Tracker Mortgages explained - Apply for a Tracker Mortgage
Tracker mortgages are one of the most popular types of mortgage, during the mortgage term the rate of interest will vary in a tracker mortgage, following changes to the bank of England base rate. The rate of interest set by a tracker mortgage is higher than the base rate but lower than the rate offered on a variable mortgage.
How do they work?
By creating a rate that is between 0.5% and 1.0% higher than the Bank of England’s base rate, tracker mortgages offer an interest rate which climbs and falls in accordance with the BOE’s fluctuations. Tracker Mortgages are agreed over a fixed period of time between both lenders and borrowers. However some tracker mortgages can span the whole mortgage term.
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What’s the difference between a Tracker Mortgage and a Standard Variable Rate Mortgage?
Tracker mortgages are very similar to variable rate mortgages, but a tracker mortgage is directly linked to the Bank of England’s base rate by adding a tariff (usually 1.5%) onto the base rate. This has the benefit over discount rate mortgages that you are guaranteed to feel the benefits of a lower Bank of England base rate where a variable rate mortgage may not pass on the savings directly.
Tracker Mortgages at a glance:
Tracker Mortgages – Pros
In general tracker mortgages are attached to lower interest rates and can also incorporate discount policies.
Tracker Mortgages – Cons
Redemption fees known as early redemptive penalties will be applied by lenders if the mortgage is abandoned before the agreed term. In addition you may be charged an overhanging redemption penalty when the base rate tracker period finishes and the standard variable rate begins. Budgeting may be difficult with tracker mortgages as the BOE’s base rate varies from month to month.
What are the risks of opting for a Tracker Mortgage?
Choosing a tracker mortgage is a risk, if interest rates rise sharply then your repayments could dramatically increase, that said if interest rates remain low you can benefit from savings that wouldn’t be available to you on a fixed rate mortgage. If you decide to take out a tracker mortgage you will be vulnerable to rises in interest rates. Furthermore with interest rates scheduled to rise, this risk could become a reality in the near future.
Is a Tracker Mortgage suitable for me?
To take advantage of a tracker mortgage you must be financially self-controlled and keep the savings you make when interest rates are low to help you afford repayments if they rise. If you don’t trust your own self-discipline then a fixed rate mortgage may be better for you as you can more easily budget for the payments ahead.
Property Advice Blog Tip!
Make sure that you research all other costs associated with the mortgage quote you are given, one of the biggest disadvantages associated with tracker mortgages is the tendency to impose large early redemption fees if you pay off your mortgage before the end of the scheduled term. Also be wary of shorter-term tracker mortgages, opting for a lifetime tracker mortgage can save you money in the long run by avoiding additional arrangement fees.