Tracker mortgages are mortgages in which the interest rate on the mortgage is set at an agreed level above the standard base rate. The mortgage then tracks that base rate religiously. Doing so means that such mortgages are often much cheaper than standard variable rate mortgages or fixed rate mortgages. Of course, with the tracker mortgage’s interest rate being linked to the Bank of England base rate, if that base rate changes then your mortgage rate will, of course, change too.
As an example, say the base rate is set at 0.5% (as it is currently) and you decided to take out a tracker mortgage with an agreed rate of 2% above that base rate, then you would end up paying interest at a rate of 2.5%. Should the Bank of England then decide to put the base rate up by 0.5% to 1% your mortgage interest rate would rise to 3%. What would that mean in real terms? If you had a £200,000 mortgage, your repayments would increase by £50 per month.
Tracker mortgages come with various term lengths in the same way that fixed rate mortgages do. The standard tracker mortgage will be for a period somewhere between two and five years, and if you want to exit that mortgage within that time frame, you will end up paying significant penalties. There are also term trackers or lifetime trackers which are free of any penalties and which you can exit at any point. These are a great option if you don’t want to be tied to one product and like to chop and change.
The Advantages of Tracker Mortgages
One of the main advantages of tracker mortgages is that they are nearly always cheaper than fixed-rate mortgages. As well as that they are simple and do what they say on the tin- although they are a form of variable rate mortgage, if you know that you are paying a set amount over the base rate then you always know what you will be paying. And as with all forms of variable rate, you know you will not be stuck in a fixed rate if the base rate drops. When interest rates are low, so are your payments.
The Disadvantages of Tracker Mortgages.
Conversely, as with all forms of variable rate, you also know that the rate that you sign on to may not be the one you end up paying if interest rates rise sharply. Tracker mortgages offer little of the security of fixed rates, and if you are on a tight budget, you need to be aware of just how much your payments could potentially rise and then work out if you could afford it if they do.