A tracker mortgage is quite similar to the standard variable rate mortgage. There is one difference however, that a tracker mortgage tracks rates from the Bank of England’s base interest rate. A tracker mortgages is also known as a variable rate mortgage that is linked directly to the base rate of the Bank of England. As a result, the mortgage’s interest rate tends to fluctuate based on the increase or decrease of the bank’s base rate. The tracker tariff can be applied for a fixed time period or for the entire duration of the mortgage term. This loan is considered an ideal choice for borrowers favoring low payments during initial stages of the loan and also holds the ability to afford the risk of making increased payments at any time in future.
A tracker mortgage’s rate percentage is generally above the rate that the mortgage is tracking. For an example, if 5.25% is the base rate of the Bank of England, then the base rate for the tracker mortgage that is being offered by the building society or bank will be about 1% over the tracker rate. Hence the base rate mortgage in this example would be 6.25%.
This variable rate mortgage offers individuals to take full benefit of the low interest rates which in turn aids to save substantial amount in making monthly repayments. In addition the first incentive tariff of this loan is nominal when compared to other fixed loans. Although this deal enables to save money, it also includes risks. Interest rates owing to varying market conditions tend to grow which will compel borrowers to make high repayments. At times it could also increase more than the initial amount paid to receive the loan.
The foremost factor is to properly determine one’s financial goals and budgetary needs before opting for a tracker loan. It is important to consider the deal when the market condition is highly favorable and the base rate is low. In addition, it is very much required to make a thorough analysis of the advantages of paying low interests as against the possibilities of making huge payments when the market fluctuates. To avoid heavy risks in future, it would also be best to look for deals with drop lock facility that helps to easily shift to fixed mortgage as and when required. It is thereby essential to perfectly weigh the pros and cons before opting for a tracker mortgage.
The difference between a discount mortgage and a tracker mortgage is that discount rates are usually linked to the standard variable rate of the mortgage provider. One thing to keep in mind is that not all lenders will pass on the Bank of England benefit rate cut. So with a discount mortgage rate, you may not always see any change in rate percentages.
Just with any other type of loan, when deciding on a tracker mortgage you should educate yourself extensively on all the in’s and out’s of the mortgage. Try as much as possible to find the best tracker mortgage deal and remember to check the small print before signing the loan contract. You should also watch out for surprise expenses such as extended early repayment charges and compulsory insurance, both of which are common in tracker mortgages. An extended early repayment charge will force you to pay the Standard Variable Rate of the lender after two years.
Moreover, you might be required to apply for a re-mortgage every two years and will probably have to pay a fair deal of money to secure a good insurance rate. If your mortgage is going to be long term, you may instead want a lifetime tracker mortgage with a set interest rate. With this type of mortgage you will not have to re-apply for a mortgage every two years and the arrangement fee will be pre-set. In some cases, the arrangement fee can even be lower than others currently on the market.
Because of the changing rate of mortgage, many consumers are choosing tracker mortgages rates so that they are not tied into a fixed mortgage rate. In addition, the interest rate decrease is passed onto the borrower automatically, although any increases is passed over as well. Tracker mortgage is not for everyone, but it continues to be attractive for people who expect the interest rates to remain stable during the period of dealing.
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