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Tracker Mortgages Explained

Tracker rate mortgages follow the Bank of England Base Rate (the rate which the bank of england sets for national borrowing) with either a percentage deducted or as is more common since the credit crunch with a percentage added on top.

Tracker mortgages follow changes in the Bank Base Rate and the mortgage payments will vary in accordance with those changes. They will usually be quoted giving their current effective interest rate. For example a tracker BBR+2.49% would give a current payment rate of 2.99% and it is this current rate of Bank Base plus the margin that is usually quoted.

Tracker mortgages therefore differ slightly from most other variable rate mortgage products as the lender has no control over the interest rate payable during the initial rate period of the mortgage, and they are obliged to pass on interest rate reductions and rises regardless of whether they elect to change their standard variable rate. It is important to remember that difference when comparing a tracker to a variable or discount rate product.

They also differ from Libor Linked Mortgages as the Libor Rate or London Interbank Offered Rate can vary greatly from the Bank of England Base Rate, in fact before the credit crunch it was common for this to be around a percent higher than Bank Base Rate, and since the beginning of the credit crunch it has been anywhere from 2.5 percent higher all the way down to equal with current BBR.

Base rate tracker mortgages often offer the lowest monthly repayments when compared to fixed rate and capped rate mortgages but consideration should be given to the risk of interest rate increases and the subsequent rise in mortgage payments that will follow.

Like most mortgage products they will usually have an early repayment charge during the initial term however these are usually lower than fixed rate mortgage products, and typically they revert to the lenders standard variable rate when the initial term is completed.

The Pros and Cons of Base Rate Tracker Mortgages

Pros:

• Minimise monthly payments
• Often the most competitive interest rates
• Normally lower early redemption penalties than fixed rate mortgages
• Wide variety of lenders and products to choose from
• Guaranteed to follow bank base rate
• Possibility of interest rate reduction and decreasing monthly payments if interest rates fall

Cons:

• Risk of interest rates rises and increases in monthly payments
• No upper limit to monthly payments
• Early repayment charges during the initial term of the mortgage

Other Mortgage Products You May Be Interested In

• Fixed Mortgage Rates
• Offset Mortgage Rates
• Flexible Mortgage Rates
• Discount Mortgage Rates
• Capped Mortgage Rate
• Variable Mortgage Rates