A Tracker mortgage is full of ups and downs. In other words, if the standard rate goes up or down a Tracker mortgage will follow suit. So what is this ‘standard rate’ you may well ask. Well, it can be based on either the standard rate of the mortgage lender or the Bank of England Base Rate.
As with all things there are advantages and disadvantages and it is up to you to decide whether, in your case, the former outweigh the latter. If not, then you might prefer to look at some of the other available options. Tracker mortgage deals can last for as little as one year, or for as long as the total loan agreement. Once it comes to an end you are likely to be automatically transferred on your lender’s Standard Variable Rate, which will normally have a higher rate of interest.
So what are the pros and cons?
Let us first of all assess the advantage, the most important of all being the fact that when rates are low a Tracker mortgage can make a remarkable difference to monthly mortgage repayments, in some cases saving hundreds of pounds per month. The savings that you therefore make when rates are low could, if you so wished, allow you to pay more on your repayments and pay off the mortgage early.
On top of this, with a Tracker mortgage you could also negotiate a discount rate and some lenders will even allow you to take payment breaks, with the result that you have a degree of flexibility, which I always a good thing.
So much for the good things, now for the not-so-good. As we have said earlier the Tracker mortgage rate can be based either on the standard rate of the mortgage lender or the Bank of England Base Rate. It is literally in your interests to find out which. If it is tracking the lender’s rate you might find that rate being increased even if the rates in the market have not moved, which means, of course, that your repayments would be greater. There may also be arrangement fees and early redemption penalties to consider and you would do well to research the possibility of other potential costs that are not apparent at first glance. The advice of a financial adviser would not go amiss.
You need also be aware of the fact that if interest rates change your Tracker mortgage could begin to cost you more. Therefore a Tracker mortgage may not be suitable for someone on a tight budget who needs to know exactly how much the monthly repayments will be. A fixed rate mortgage, in such circumstances, would seem to be the more sensible option.
So, before you decide on this type of mortgage not only should you carefully consider the points raised above, it would be wise of you to seek some independent mortgage advice in order to ensure that you are, indeed, making the right choice for your particular financial situation.