Tracker mortgages follow the base interest rate of the Bank of England in the UK. How it works is quite simple, if the rate at the bank increases or decreases, then the same fluctuation is passed along to the tracker mortgage interest rate. For example if you had a tracker mortgage that was at 5% and the Bank of England’s rate dropped by 1%, your mortgage would now have a 4% interest rate without refinancing. It’s more of less the opposite of a fixed rate mortgage that is not dependant on the current market rate.
Of all the available mortgages currently available to buyers, the tracker mortgage is one of the most popular based solely due to the non-fixed interest rate. People hope that over the course of their mortgage, the base rate will fall, thus giving them a lower payment requirement and also saving them a lot of money on interest. After the rate changes at the bank, the rate change on your mortgage usually takes effect within a 30 day period time. However, you also run the risk of having the interest rate increase, due to a rate increase at the bank.
The other mortgage type that tracker mortgages are most often compared to is the discount mortgage. The discount mortgage works in the exact same way as the tracker except that it’s tied to the lender standard variable rate which most time is slightly higher so the advantage still falls on the side of the tracker mortgage. The disadvantage still applies to both mortgages in that if the interest rate climbs, so does your payment
Even within the tracker mortgage there are some variations to be aware of. The two big variations are in the base rate and how long the rate fluctuates before returning to the original rate at the time the mortgage was taken out. Talk with your lender to find out exactly what is best for your situation.
Moreover, like any other mortgage, it is always better to get yourself educated and not to rush into signing a tracker mortgage. Tracker mortgages however are typically the best option for home buyers.
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Fantastic, Thanks for the clear explanation.
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