Tracker Mortgages: Understanding How They Work and Choosing the Right One
A tracker mortgage is a type of mortgage where the interest rate is tied to a separate interest rate, such as the Bank of England base rate. If this interest rate changes, the interest rate on the tracker mortgage will change in the same direction.
How does a tracker mortgage work?
Tracker mortgages are tied to a benchmark interest rate, which means that when the benchmark rate changes, the interest rate on your mortgage changes too. This can result in lower monthly mortgage payments if the benchmark rate falls, or higher monthly payments if the benchmark rate rises.
What are the advantages of tracker mortgages?
One of the main advantages of tracker mortgages is that they often have lower monthly payments than fixed rate mortgages. This is because the Bank of England base rate has been, which most tracker mortgages are linked to, has been very low for some years.
Tracker mortgages usually come with more flexibility than their fixed-rate alternatives, often coming with no early repayment charges or the ability to overpay as much as you like which means you may be able to switch your mortgage earlier than you would be if you fixed.This does depend on your specific mortgage though, and you should always let your mortgage adviser know if having these features is crucial to you.
Another advantage is that if theBank of England base rate falls, you will reduce your monthly mortgage payments too. This may allow you to make overpayments towards your mortgage paying off your mortgage quicker and paying less interest over time.
What are the disadvantages of tracker mortgages?
The main concern with tracker mortgages is concerning the interest rate the mortgage is tied to can increase as well as decrease. As interest rates have been extremely low for some years, many leading economists and financial institutions are predicting that if interest rates are going anywhere, it's up. The risk and uncertainty of not knowing what your monthly repayment will be one month to the next means you may struggle to budget.
Regardless of the direction of the benchmark interest rate, with a tracker mortgage, you won't have certainty of your repayments during the term of the tracker. Whatever happens, there can always be a change in your monthly repayments, whether that's up or down.
You may find it harder to qualify for a tracker mortgage as some lenders are stricter with who they will accept for a tracker mortgage, due to the uncertainty of what your monthly repayments will be.
Tracker mortgage or fixed rate mortgage?
Fixed-rate mortgages, as the name suggests, have a fixed interest rate that does not change over a fixed period.This means that your monthly mortgage payments will remain the same, regardless of any changes with the Bank of England base rate or the standard interest rate set by your lender. However, fixed-rate mortgages typically have a higher interest rate compared to tracker mortgages, which means that your monthly repayments will be higher.
What does a tracker mortgage track?
There are two main types of tracker mortgages: base rate tracker mortgages and LIBOR tracker mortgages.
Base Rate Tracker Mortgages: Base rate tracker mortgages are tied to the Bank of England base rate. This means that when the base rate changes, the interest rate on your mortgage changes too.
LIBOR Tracker Mortgages: LIBOR tracker mortgages are tied to the London Interbank Offered Rate (LIBOR). This is a benchmark interest rate used by banks to determine the interest rate they charge on loans to other banks. LIBOR tracker mortgages are much less common for residential mortgages as they are seen to be more volatile, it's likely if you've heard of a 'tracker mortgage' it's linked to the bank ofEngland base rate.
Eligibility Criteria for Tracker Mortgages:
To be eligible for a tracker mortgage, you need to meet certain criteria which is similar to all mortgage applications:
Credit Score Requirements: You will need to have a good credit score to be eligible for a tracker mortgage. This is because tracker mortgages are seen as a higher risk for lenders compared to fixed-rate mortgages.
Employment and Income Requirements:You will need to be employed and have a stable income to be eligible for a tracker mortgage. This is because lenders want to ensure that you can make your monthly mortgage payments.
Property Type Requirements: Youwill need to have a property that meets the lender's requirements to beeligible for a tracker mortgage. This may include factors such as the value ofthe property, its location, and its condition.
How to Choose a Tracker Mortgage:
When choosing a tracker mortgage, it is important to consider the following factors:
It is important to compare tracker mortgages offered by different lenders to find the best deal for you. This may include factors such as the interest rate, the length of the mortgage term, and any fees or charges associated with the mortgage.
Consideration of the Long-Term Financial Implications: It is important to consider the long-term financial implications of choosing a tracker mortgage. This includes considering the potential changes in the benchmark interest rate and how this will affect your monthly mortgage payments.
In conclusion, tracker mortgages can offer lower monthly mortgage payments compared to fixed-rate mortgages, but they also come with a higher level of risk. It is important to carefully consider the long-term financial implications of choosing a tracker mortgage and to compare tracker mortgages offered by different lenders.
The best way of finding a tracker mortgage that suits your needs is to speak to a broker like us, give the office a call at 0333 090 3221 and we'll be able to complete your tracker mortgage application, help you make an informed decision or answer any questions you may have.