A tracker mortgage lets you pay whatever you like over the term of the loan. It is simply the interest on the loan, plus a certain additional charge for you over that to be payable on a set schedule. For instance, if your tracker mortgage is a Base Rate +2%, and the base rate is 1%, you’ll pay 6%. Likewise, if the base rate rises to 2%, you’ll pay 8%. The advantage of tracker mortgages is that the interest you pay changes as interest rates move in tandem with the financial market.
When base rates move in tandem with the financial market, the interest you pay changes. The rate you repay to your lender changes when the Bank of England base rate rises and falls. As long as you’re making your repayments according to the new index rate, you’ll enjoy low interest costs. However, should the Bank of England base rate fall by 2%, for instance, then you may find that your repayments increase, just as they would if they had risen by the anticipated inflation rate.
In addition to this, your tracker mortgage comes with a tracker element. This is what allows your tracker mortgage to vary according to the prevailing interest rate. Should it rise by 2% as expected, then you would pay more in excess than if it falls by the predicted rate. However, should the base rate fall by the predicted rate, then your tracker rate will end lower than it was at. Should the base rate rise above the tracker rate, then your tracker mortgage will come up to reflect the higher rate.
Fixed tracker mortgages are another type of variable rate mortgage, where your interest rate remains set for the entire life of the loan. It’s useful for people who want to make sure that they’re not paying more interest over a longer term than they would with an interest only deal. For example, many parents with a home improvement project will opt for fixed tracker mortgages to protect their capital while making improvements to the property. They’ll also be able to plan out their finances without worrying about whether the base rate or any other interest rate will rise.
With an interest only tracker mortgage, on the other hand, you don’t know what your repayments will be until the end of the loan term. This is because the amount you pay each month is based on how much you owe at the start of the loan, not at the end. If, for example, you owe 5x the value of your property when you take out the loan, then you’ll be able to calculate how much your monthly outgoings will be. If it turns out that you need to make more money monthly, then the repayments can reflect this extra cash.
However, there’s more to comparing the two lenders as well. While variable rate mortgages are often thought to offer better deals overall, this may not always be the case. If you want to base your decision solely on the cost of the loan without regard for what rates will be offered at the end of the loan term, then a tracker mortgage could prove to be more cost-effective. The reason for this is that you’ll know ahead of time what your payments will be. By sticking to the same payment amount throughout the term, you’ll know that you’ll be able to keep up with it.
Of course, some customers will find that using both mortgage types can save them money overall. Those customers who opt for variable tracker rates but avoid the interest only option will often find that their mortgage cost more over the long term. Similarly, customers who opt for a fixed interest rate but switch to tracker rates will usually find that they’re able to lock in a better deal than they’d have been able to if they had chosen tracker mortgages.
As with all financial decisions, it’s always important to carefully consider whether or not switching to a tracker deal is a good idea. Just as with most other financial products, there are benefits and downsides associated with tracker mortgages. On the one hand, those who use interest only repayment plans won’t enjoy as many benefits as those who choose fixed term repayment plans. In addition, it can be hard to calculate the savings from switching to a tracker mortgage at the beginning of the loan term. However, if you need to make large monthly repayments (such as for a second home) then changing to a tracker mortgage could prove to be a worthwhile option.