There are any types of mortgages and if you talk to different mortgage holders it is likely that they will all give you different information about which type of mortgage they feel is the best. They will probably prefer the type that they have got, unless they have had a really bad experience with it. It can therefore be difficult to know which is really the best unless you speak to a financial advisor. However, you can find out more for yourself by doing research. If you find out more about the types of mortgage and how they work, then you will be able to more easily work out how they might benefit you.
What is a tracker mortgage?
A tracker mortgage is one that will track the base rate. The base rate is shorthand for the Bank of England Base Rate and this is the interest rate that the Bank of England lends money out to banks. If this rate changes then banks may choose to change the rates on the money that they are lending. This might apply to new borrowers as well as existing ones, depending on what type of borrowing they have. With a tracker mortgage, the interest rate that you are charged tracks the base rate. You will be charged a fixed amount in addition to the base rate. The fixed amount will cover the costs of the lender and the base rate will cover their interest rate. If the base rate goes up then the tracker rate will go up by the same amount and vice versa if it goes down.
When is it advantageous?
If interest rates fall then a tracker mortgage rate will also fall. This means that the borrower will immediately be able to take advantage of the reduced rates. Often with other variable rates it will take longer for the lender to lower rates or they may decide not to lower them at all. So, when rates are going down or staying low for a long time, the tracker rate is really good. It will mean that you will only be paying a low rate of interest on your mortgage. This will make the mortgage repayments cheaper. This could free up money for paying other things or could mean that you can afford to overpay your mortgage a bit so you will repay it early and save money on interest in the future, perhaps when the rates are significantly higher.
When is it not good?
If the base rate goes up then the tracker mortgage rates will go up too. This will happen very quickly and will mean that you will quickly be paying the higher rates. This is not so good as obviously no borrower wants to be paying more. If the rates go up a lot, then it could mean that you will be paying more and more in quick succession which could mean that things will get expensive very quickly. Some people do not like the uncertainty of this as they are worried that they will not be able to afford the repayments if the rates go up too much. If repayments cannot be paid then there will be extra fees or charges and this is not good. If the problem gets too bad the borrower may go to court or even have their home repossessed.
Is it worth having?
It can be quite a tricky decision to know whether it is good to have a tracker mortgage or not because it is impossible to predict what the interest rates might do. If you think that the interest rates are likely to go down, then having a tracker mortgage could be great. Often when rates fall, lenders are slow to lower the rates of loans, but with a tracker they will have to lower them. However, if rates go up, they will tend to raise rates for all loans pretty quickly, this means that in this situation there will not be much difference between a tracker and a variable rate loan. This means that a tracker is probably always better than a variable rate loan. However, there could be some advantage in having a fixed rate loan, especially if you think rates will go up. It will mean that you r interest rate is fixed for a certain period of time and therefore you will protected against rises in rates. This is especially good if you feel that it will be a struggle to make higher repayments. However, the interest rate for fixed rate mortgages tends to be higher than that of variable rates so you may still end up paying more. It is very hard to know until after the fixed term has ended. It is worth remembering though that lenders want to make as much profit as they can and so they will set the fixed rates at a level where they will expect to profit as well as they expect to from a variable rate.