Category: Mortgages

Is a Tracker Mortgage a Wise Idea?

A tracker mortgage has a variable interest rate which will change when the base rate changes. The base rate is the interest rate which is controlled by the Bank of England and if they change the rate, which they make a decision on monthly, then the rate that you pay will change as well. You will find that your lender will change your rate within a day of the change of rate being announced. Your lender will add on a fixed rate to the variable tracker rate, which will be their profit. It is worth comparing tracker mortgages to choose the one which looks like it offers the best value for money. This fixed rate could be one factor to consider but you also need to think about the customer service the lender has, whether you like the idea of borrowing from them, what other costs they have, how flexible they are and anything else you feel is important.

A tracker mortgage is a very good idea when interest rates are dropping. Often when a rate drops, lenders will not be in a hurry to drop their variable rates. They will want to take advantage of being able to borrow at a lower rate and still charge a higher one and therefore make more profit. As lenders do start to drop their rates, in order to become more competitive, they may do the same thing, but it is unpredictable. You could lose out compared to having a tracker because the rate for that will drop right away.

When rates are rising you may not be so lucky though. A tracker rate will go up immediately, but other variable rates may not rise so quickly. However, lenders will want to keep their profits as high as possible so it is unlikely that they will delay too long before increasing their rates as well. It may be that someone with a tracker will not lose very much in this situation and probably will gain a lot more when rates drop.

A tracker does have that fixed rate with it though which will always have to be paid regardless of the base rate. This could be a disadvantage if it is very high but great if it is low. All lenders will add on a charge like this – you will see it in their variable rates, as they will be higher than the base rate. However, on a variable rate, they may change how much they charge but with a tracker they usually do not. It can depend on what is in your agreement though.

Some people prefer to have a fixed interest rate. These will not last for the full term of the mortgage but perhaps for a few years or up to five. The advantage of these is that you will know exactly what you will be paying and so if you do not have a lot of spare money, you will be protected against rate increases. However, if the rate falls you will end up paying extra. Lenders usually set the fixed rate quite high so that they still make a profit even if the base rate goes up.

So there are quite a few things to consider when you are deciding whether to have a tracker mortgage. You need to think about whether you are happy to have a variable rate, which could go up as well as down. You need to check the price against other lenders and see whether you can get good value for money. You need to also see who is offering tracker mortgages and decide whether you think that you will be happy having a mortgage from that company. There are a lot of things to think about. If you time your tracker well and get one as rates are falling then you could really see some advantages. It is not easy to predict what interest rates will do though, but the lower they are, the more likely they are to rise and vice versa. You can also find out what the head of the Bank of England has to say about rates and what they plan to do with them in the future based on the current state of the economy.