Tracker Rate Mortgages
Tracker mortgages also called rate tracker mortgages are directly linked to the Bank of England base rate which means that your mortgage rate will fluctuate each month. This makes having a tracker rate mortgage unsuitable for those on a tight budget as it is not possible to predict how much your monthly mortgage payments will be.
If your finances aren't stretched a tracker rate mortgage is a great way of making immediate savings on any reductions made on the BoE base rate. This is one of the benefits of a tracker mortgage over discount and capped mortgages which are both linked to a mortgage lenders standard variable rate (SVR). While mortgage providers are quick to increase their SVR each time the Bank of England base rate rises, not all lenders are so keen to pass on savings to their customers when there is a cut in the base rate.
A tracker rate mortgage is set to cost a percentage - or fraction of a percentage - more than the Bank of England base rate. So if the BoE base rate should rise by 1%, your mortgage will also rise by the same amount, likewise if it falls your monthly repayments will reflect the decrease.
What are the benefits of a tracker rate mortgage?
When the Bank of England base rate is cut the savings are passed on immediately. The interest rate is also lower than a lender's standard variable rate.
What are the disadvantages of a tracker rate mortgage?
When the Bank of England base rate increases, mortgage repayments will rise in line with that increase. Tracker mortgages also tend to have redemption penalties, which are hefty charge that are levied if your mortgages is changed before the agreed term ends. At the end of this agreed term a number of mortgage providers also have extended tie-ins, where payments revert to the lenders standard variable rate which can be an increase of 2% or more.
There can also be a number of other hidden clauses which the small print needs to be checked for. Some providers may specify a minimum rate you have to pay to protect them should the base rate plunge below expectations. Other providers are slow to pass on benefits, so you need to check how quickly any base rate changes are passed on to your mortgage.
With all this uncertainty it will make budgeting a difficult task as there is no way of knowing what your monthly repayments will be.