The basic definition of a tracker mortgage is actually quite simple. A tracker mortgage is a mortgage type where the interest rate is based on the Bank of England’s base rate. This is considered a variable rate mortgage as opposed to a fixed rate because the rate various in conjunction with the base rate.
What’s even more interesting is how popular this type of mortgage is. Roughly 20% of all mortgages are some form of a variable rate mortgage.
Obviously the best time to have this type of mortgage is when mortgage rates are low. The lower the interest rate is the lower your payment will be and over time the lower the total amount of interest you’ll have to pay. While a small increase in the interest rate doesn’t seem like a big deal it can be depending on your mortgage size. A small increase in the interest rate can really increase the payment if you have a larger mortgage.
On the flip side of a low base rate which translates into one of the best tracker mortgages, having a high interest rate can make a home that was previously affordable completely unmanageable. Let’s look at an example. If you get your tracker mortgage with an interest rate of 5% and your loan amount if $350,000 dollars you’d have a mortgage payment of approximately $1,800 dollars. Now if the Bank of England’s base rate changes and your new interest rate is 9%, you’d be looking at a monthly mortgage payment of $2,800 dollars. That’s $1,000 more per month you’d have to pay. Luckily most mortgages have a clause that states the interest rate can only go up so high before it stops rising. This is referred to as a cap.
No related posts.