Tracker mortgages are unique and charge a rate of interest in accordance with the base rate set by the Bank of England. The actual tracker mortgage rate would be a few percentages higher than the base rate. The simple definition of base rate is the cost the bank pays to buy money. It varies with the changes in the economy and so we can expect a rise or fall in the base rates.
When your interest rates are aligned with the base rate then they would also go up and down as per the performance of the economy. This means that when the economy is falling so will your interest rates and when the economy will be booming then you need to pay higher interests. If you have a clear idea about the economic performance and are sure things won’t change in the near future then choosing a tracker mortgage would work in your favour.
Benefits of tracker mortgages:
When the borrower knows that the economy is stable and won’t fluctuate for a certain period of time then they can choose the tracker mortgages so as to save themselves from the surprises of paying higher interest rates.
There is also a mechanism of capping tracker mortgages and some of the lenders implement it. This is highly beneficial when the economy is growing at a higher rate because at that time your interest rate would be charged as per the capping limit and so, you can be saved from paying huge amounts as repayments.
When the base rates go down then you can pay more monthly repayments and thus cut off your debt quite quickly and comfortably. By taking advantage of the low rates, you can actually reduce your mortgage without any hassle.
Risk associated with tracker mortgages:
The main risk associated with tracker mortgages is that if the base rate set by the Bank of England increase then it will also reflect on your interest rates. It will compel you to pay higher rates of interest on your mortgages.
Major difference between tracker mortgages and variable rate mortgages:
You do not need to get confused between the two terms just because the rate of interest changes in both the cases. The major difference between the two is that while variable rate mortgages follow the Standard Variable Rate (SVR) charged by the lender or the bank that offered the mortgage loan, the tracker mortgage follows the Bank of England’s base rate.
The catch with the tracker mortgages:
There is no catch as such debarring the aspect that with the changes in the base rates your interest rates will go up and down. However, the main thing is that as the rates are not governed by the lender and is solely dependent on the Bank of England base rates, you can easily keep an eye over the rise and fall of the rates and so can be prepared for things in advance. This just saves you from any nasty surprises from the lending end.
Frequency of changes in the interest rate:
Normally, the Bank of England makes changes on the first Thursday of every month and this also depends on the changes in the bank charges. It depends on the economic strength and the rate of borrowing across the UK.
Switch from fixed rate mortgage to a tracker mortgage:
Well, this is normal and borrowers can switch to tracker mortgage once their fixed rate interest period is over. However, if you want to make a move early and before the end of your term then you may need to pay early repayment charges to the lender. You need to check this in advance with your lender.
If you want to know more about mortgages in the UK or want comparison between various UK mortgage providers then visit our website freepricecompare.com. For an on call consultation about queries and dilemmas, feel free to call our easily approachable team of mortgage experts at 08008807656.