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Tracker Mortgages Demystified

in Mortgages

What is a Tracker Mortgage?

Before getting into the details of tracker mortgages or variable-rate mortgages, it is imperative to understand its basics. Variable-rate mortgage is a type of mortgage where the mortgage interest is governed by the base interest rate set by the Bank of England. The mortgage interest rate will generally be set at a certain percentage above the rate set by the Bank of England.

In this mortgage, one’s mortgage repayment amount varies according to the change in the base rate of interest. This mortgage is suitable for people who do not mind taking risks to gain some financial benefit in their mortgage repayment. This is because the mortgage interest rate is variable, it involves some risk. If the base rate of interest rises, one will end up in more repayment. However, if it falls, one can enjoy the benefit of paying less interest on his or her mortgage loan.

There is also a variant of this type of mortgage, which is called “Capped Tracker Mortgage.” In this kind of setup, a limit is set to the maximum mortgage rate, irrespective of the base rate. If the base rate rises beyond the maximum limit set, one still ends up paying only the maximum interest rate that is pre set.

Are There Any Catches with Variable-rate Mortgages?

Not really; except the known risk that the mortgage interest varies as per the base rate of interest set by the Bank of England, there is no other. In fact, one can be more reliant of Bank of England, than on the lending institution. With variable-rate mortgages, one can have complete visibility on the changes in the interest rates.

How Often Does The Interest Rate Change?

The decision with regards to changes in the interest rates is decided by the Bank of England on the first Thursday of every month. Any changes in the base rate of interest majorly depend on the fluctuations in the overall economy and also the nationwide borrowing rate.

Is Tracker Mortgage, the Best Mortgage Option for me?

Well, the answer is, it depends. It depends on several factors and one would have to really evaluate the pros and cons of any mortgage type before opting for one. By opting for variable-rate mortgage, one may sometimes end up paying the lowest interests ever, based on how the base rate varies. On the other hand, one may also face the possibility of making huge payments, when the economy fluctuates on the opposite side. To balance the amount of risk and benefits involved in variable-rate mortgages, one may consider opting for variable-rate mortgages with drop lock facility, wherein one has the option to change to fixed mortgages, as and when needed.

Some Facts Related to Tracker Mortgage

Though not in all cases, sometimes the variable-rate mortgages may involve unexpected expenses like charges for extended early re-payment, compulsory insurance, etc. With extended early repayment charge, one ends up paying the standard variable rate fixed by the lender, two years after lending. Further, one may also have to apply for a re-mortgage, after every two years, which can involve paying a good amount of money for securing better insurance rates.

Better Option for a Long Term Mortgage

In case of a long term mortgage, one may consider to opt for lifetime variable-rate mortgage that comes with a pre-set interest rate. Such mortgage type will not involve re-applying for the mortgage after every two years, and the arrangement fee would be pre-decided.

Summary

Variable-rate Mortgages are very attractive mortgage options for people, who do not mind taking some amount of risk or who have an appetite for risk in order to enjoy the advantages of lowering interest rates. With a detailed analysis and calculated risk, variable-rate mortgages can often turn out to be one among the more beneficial options. However, one needs to be clear with his financial goals and budgetary constraint before opting for variable-rate mortgages. One can also consider opting for lifetime variable-rate mortgage, if one’s mortgage tenure is long term. After evaluating all the major points, one can confidently decide on which kind of mortgage that he would like to opt for, to enjoy the maximum benefits.