In their simplest definition, Tracker mortgages follow the Bank of England’s interest rate as it goes up and down at a constant differential agreed with the mortgage provider. As a result of this, this type of agreement is sometimes referred to as a variable tracker mortgage.
The best way to understand how a tracker mortgage works is to use an example. So if the Bank of England has set the base rate at 4.75% and you have a variable tracker mortgage set at 0.25% then the interest you will pay is 5%. If the base rate then falls to 4.5% over the course of your agreement, you will then only have to pay 4.75% interest. On the other hand, if interest rates rise to 5.25%, you’ll then have to pay 5.5% interest.
Now you know what a tracker mortgage is, you have to work out whether it will work out cheaper for you. Banks and other providers do offer great discount tracker mortgages that come with excellent introductory offers. For example, some will offer you the first two years at a discounted 0.5% above the base rate, which will then revert to a standard 1.0% when this period ends. This can save you a significant amount of money, especially if interest rates are low.
If you have a good knowledge of the economy or have been advised that interest rates will drop over a certain period then a tracker mortgage will give you lower repayments than most fixed agreements. Mortgage trackers are therefore popular with people who work in the financial sector and have a good idea of interest trends.
There are various agreements that you can secure when it comes to tracker mortgages. For example, you can get a 5 year tracker mortgage that you have the option to alter to a fixed rate deal for no extra cost. This is popular because it allows you to take a small gamble with the safety net of a fixed arrangement always on the table.
For people looking for long term deals, you can get lifetime tracker mortgages that track the base rate for the entire term of your mortgage. These obviously represent much more of a gamble than short term deals of 2 or 3 years.
There are unfortunately some drawbacks to the variable tracker mortgage. The obvious negative is that if the base rate increases you have to be able to cope with increased monthly repayments. This also means that setting a budget can be difficult, because your mortgage repayments can change every few months.
Even though tracker mortgages can save you a significant amount of money if interest rates drop, many providers stop you taking full advantage by employing what is known as a ‘collar’. This basically means that if the base rate drops below a certain level they don’t have to lower your interest any further. So for example, if the provider put in place a 3% collar and the base rate drops to 2.5% you still have to pay 3% plus your arranged tracking rate. If you’re thinking about applying for a tracker mortgage, then make sure you check to see if there’s a collar.
The introductory periods on tracker mortgages are usually a massive incentive for consumers. But many fall into the trap of not planning their budget for when this period ends and their rates revert to the higher standard figure. It’s imperative that if you’re taking on a tracker mortgage, you consider how much you’ll have to pay before and after the introductory period ends.
So if you’re thinking of taking on a tracker mortgage, then make sure you understand all of the items involved in the agreement and are comfortable with the potential consequences of rate increases. Sound planning will ensure you get all the benefits out your tracker mortgage without any of the drawbacks.
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