There are lots of different types of mortgages and it can be confusing when you are choosing a mortgage or if you are wondering whether to remortgage. A tracker mortgage is a specific type of mortgage and it can have advantages and disadvantages. It is a good idea to find out more about it and what its features are so that you can decide whether it might be a good option for you.
What is a Tracker?
A tracker mortgage will have an interest rate which tracks the base rate. So, the lender will tend to charge a fixed percentage and add that on the base rate. The base rate is the interest rate set by the Bank of England. This means that whenever the base rate changes your rate of interest will change on your mortgage. The fixed part that you pay to the lender will always remain the same but the variable part will change.
What are the Benefits?
If the base rate falls, then your interest rate will fall and it means that you will pay less interest immediately. You may think that this will be the case with all variable rate mortgages but it may not be. Lenders do not have to lower their variable rate when the base rate changes and they may decide not to lower it or they may lower it but not by as much. If you have a fixed rate, then it will not change at all so if rates fall, then you will not benefit from this. They may even raise it in between base rate changes and you could end up paying more even if the base rate does not go up. This means that while the base rate is falling you will be paying less in interest.
It can often be the case that a tracker will be cheaper than other types of mortgage rate. However, this will depend on what the fixed percentage is that the lender charges on top of the base rate and how high the base rate is compared to the average variable and fixed rate mortgage. It can be good to have a tracker while the rates are falling as you can take advantage of those rate reductions, but of course, predicting whether the rates are going to fall or rise is not easy. You may feel that if they have been low for a long time they are likely to rise, but recently this has not been the case with very small rises being followed by a huge cut to historically low levels.
What are the Risks?
If you take out a tracker mortgage and the interest rates rise then you will pay more and more interest on your loan. This will mean that it gets more and more expensive. If you have a variable rate mortgage, it is likely that the rate would go up anyway as most lenders would increase their rates in line with the base rate. However, if you have a fixed rate, then you would protected from rate increases so this could be beneficial in this circumstance. As mentioned above, predicting rates is very difficult to do though.
It is worth calculating whether you could afford an increase in rates. Work out how much extra you would have to pay if rates increased. You may wonder how much to assume it goes up by, but rates have never historically been above 20% and it is unlikely they would jump up very quickly or by massive amounts, so perhaps work out how much more you would pay if it went up by 5% and then think about whether this is an amount that you feel you would be able to afford. Do remember though, that you are not normally tied in to a tracker mortgage, so you could switch to a different one if you felt it was just getting too expensive, but it is likely that others will be dearer as well.