What Are Tracker Mortgages?
With a multitude of mortgages available what are the benefits and disadvantages of the product known as a tracker mortgage?
Keep in line
If fixed rate mortgages are generally recognised as being for people who like to err on the side of caution, a Tracker mortgage is probably best used by those who enjoy a little more risk in their lives.
The Tracker mortgage enjoys a variable interest rate which is linked to the Bank of England Base Rate. As the Base Rate goes up, your mortgage will go up by the same percentage. As it comes down, so your mortgage will follow suit. These changes are effective as soon as the Base Rate changes are announced. So it mirrors exactly what The Bank of England does with the Base Rate.
Bank of England
Some of these Tracker mortgages are stated as being linked directly to the base rate of another financial institution, such as a particular High Street Bank. But given that all the banks take their lead from the Bank of England it still more or less amounts to the same thing.
The difference with this mortgage from a standard variable one is that the rate will definitely change when the Bank of England changes its base rate. With a standard variable mortgage it is up to the discretion of the individual lending company whether they pass on the Bank of England’s rate change to their customers or not. So, with a Tracker mortgage your monthly repayments are likely to keep changing more often than other mortgage products.
Compared to some of the other mortgage products on the market Tracker mortgages are a comparatively recent introduction. This is probably a reflection of the relatively calm interest rate levels we have experienced over the last half a dozen years or so.
Prior to this period of calm interest rates were up and down like a proverbial yo-yo so it would have been most infuriating to have had a Tracker that changed almost every month. And if they had been in existence in the lead up to the last big recession in the early nineteen nineties it would have just gone up and up and up and up.
Back then there was one day in particular when interest rates reached over 15% as the Chancellor (then in charge of adjusting Base Rate) tried to put the brakes on hard on the countries overheated economy. On that day there were many people looking very ill on hearing that particular news!
That was a time when repossessions were soaring as people simply could no longer afford the new levels of repayments on their mortgages. Hopefully the market will not go back there again in a hurry. This is the danger with a Tracker mortgage: it has no upper limit, no cap to how high the interest rate can go.
Some Tracker mortgages come with additional benefits, for instance there is one available from Direct Line that offers a two year reduced tracker of just 0.1% above base rate. After that introductory period it tracks the base rate at 1.1%. Although this particular product has early redemption penalties it does also offer you the opportunity to pay it off quicker by allowing you to pay in additional funds. It’s a good example of how flexible some of these products have now become.
Not tracking the distance
Many Tracker mortgages only operate the tracking element for a limited time before they revert to the company’s standard variable rate of interest. The tracker period can be anything from 1 to 10 years. It would be worth finding out what the standard interest rate is likely to be if you are considering a Tracker that is not for the life time of the mortgage, especially if you are considering only tracking for a short period. Each lender will have a different standard rate above Bank of England Base rate that they charge borrowers.
One advantage of the Tracker is that you can see clearly what you are going to be paying. With a standard variable rate mortgage the lender may adjust the amount they pass on to you slightly either up or down form the Base Rate change. So, for example, if the Bank of England put its rate up by 0.25% the lender may put its rate up to you by 0.3%. It’s only slight, but it makes a difference.
If you like to see instantly by how much your mortgage payments are going to change when the Bank of England adjusts its Base Rate, then a Tracker mortgage could well be the one for you. But as we always say, shop around and read the small print!