Tracker mortgages follow changes in the base rate,
with a constant differential being maintained between the
base rate and the mortgage interest rate. A lender's standard
variable rate will typically be around 1.5% above the base
rate. In addition, a fall in the base rate will not always
necessarily be followed by an equivalent fall in the standard
variable rate.
However, tracker mortgages tend to have a smaller
difference above the base rate, down to around 0.75% or
even lower, and they are guaranteed to rise and fall with
the base rate. This means if the base rate rises your monthly
payments will rise. If the base rate falls your monthly
payments will fall.
The period for which the tracker mortgage applies
may be for a fixed term only, say 5 years, after which time
the interest rate will revert to the lender's standard variable
rate. Tracker mortgages are also available that persist
for the full term of the mortgage.
Some mortgage lenders will offer different tracker rates
depending on the amount you are borrowing as a percentage
of the value of your home (LTV - Loan to Value). For example,
0.75% above the base rate may be offered for a mortgage
with an LTV of 90%. Alternatively, 1.5% above the base rate
may be offered for a mortgage with an LTV of 95%. A tracker
mortgage may be offered in conjunction with a discount offer.
For example, 0.5% above the base rate may be offered for
the first 2 years, rising to 0.75% above the base rate after
the discount period.
Pros and cons of a tracker mortgage
Advantages The interest rate payable will usually be lower
than the lender's standard variable rate. You can benefit
from all drops in the Bank of England's base rate as they
will always lead to an equivalent fall in your tracker mortgage's
interest rate.
Disadvantages Early redemption penalties may apply which
could extend beyond the end of the discounted period. This
means you will be unable to change your mortgage during
the 'early redemption penalty period' without paying a fee,
which may be up to the value of six months mortgage repayments.
The Bank of England base rate can be unpredictable and can
increase rapidly, resulting in an increase in your monthly
payments. It is less easy to budget as the interest rate
can and will vary.
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