Tracker Mortgages: What You Need To Know
Tracker mortgages are specifically connected with the Bank of England’s base rate. The Bank of England has a Monetary Policy Committee (MPC) which gets together on the first Thursday of each month to discuss the economic climate and decide if the interest rate needs to be higher, lower or stay the same.
The vast majority of lenders offer tracker mortgages which have an interest rate set at a certain amount above the base rate. This may deviate among lenders however with base rates at historical lows you may be finding deals of around 2-3 percent higher than base, depending on the size of your deposit. Before the credit crunch it wasn’t unusual to find tracker deals which were set at a percentage below base rate but these deals have all run out now. Indeed, some financial institutions who had offered these deals ended up with customers who didn’t have to pay any interest at all for a while on their loans.
How does a tracker mortgage work?
When the gathering of the Bank of England’s MPC finishes they declare what the base rate will be that month. If the base rate rises by 0.25 percent the interest repayments on your mortgage will increase by 0.25 percent the subsequent month. Likewise, if the base rate is lowered you will gain from more reasonable mortgage repayments.
Tracker mortgages can be for the total period of the mortgage whereby they are often known as lifetime trackers. They can all have fixed terms – usually for two, three or five years. The same financial institution will typically charge a variety of premiums above the base rate determined by your needs. If you have got a greater down payment you can expect to pay a lower premium. A shorter time frame may also typically have a lower premium – so lifetime trackers attract heftier premiums. Furthermore some loan companies will give you the option of having a reduced premium if you go with a higher arrangement fee.
Pros and cons of tracker mortgages
Pros: Tracker mortgages generally offer some degree of flexibility, permitting you to make overpayments which will allow you to pay your mortgage off early. They typically have smaller or sometimes no early repayment charges (ERCs). You almost immediately gain from cuts in the base rate.
Cons: You are at the mercy of base rate increases – any increases will see the interest payments on your mortgage also increase. Interest rates are at historic lows so there is actually small scope for further} reductions in the base rate. Mortgage loan companies are now tending to put a floor on exactly how low their tracker rates will fall irrespective of what the base rate does.
Interest rates differ significantly among lenders therefore it is in your own best interest to talk to a mortgage consultant who will offer you professional advice as well as help you make up your mind on the most suitable mortgage for you and your life style, considering not just the interest rate but the accompanying fees and charges too.