What is a tracker mortgage?

For most people, getting a mortgage is one of the most important financial decisions in their lives. When you start to look for the best mortgage, you will see hundreds of mortgage products with different names and associated mortgage deals and interest rates. As a borrower, it is important that you understand the different types of mortgages so you can choose the mortgage that is best suited for you. In this suite of mortgage guides, we look at the different type of mortgages available in the market.

Previously we discussed discount mortgages, in this mortgage guide, we will focus on variable rate tracker mortgages.

A tracker mortgage is a 'type of mortgage' that is based on variable interest rates.

Tracker mortgages

The interest rate on tracker mortgages is directly correlated to another interest rate, let's say, the base rate set by the Bank of England, plus some extra percentage. If there's a 1% increase in the base rate, your interest rate will go up by 1%. Typically, trackers are available for a short period of two to five years. However, some tracker offers may be available for the entire term of the mortgage.

Example: Nationwide is offering a tracker rate mortgage of 1.44% - Bank Base Rate plus 0.94% for 2 years. This means during the first two years, the interest rate is related to the base rate of Bank of England, which is 0.5% as of December 2014, plus 0.94%. This works out to a rate of 1.44%. If the Bank of England base rate goes up by say 0.5%, the rate of this mortgage will also go up by 0.5%.

Advantages of tracker mortgages

  • You can be assured that your interest rate will increase only if there's a change in the external financial environment, and not whenever the lender wants to increase the rates.

Disadvantages of tracker mortgages

  • There is uncertainty about how much you are going to repay in the future. If there's a substantial jump in the base rates, you will end up paying much higher.

Next: Offset Mortgages

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