A relatively new type of mortgage is the tracker mortgage or base rate tracker mortgage, which supplements the already existing variable rate and fixed rate mortgages. The track mortgage falls somewhere in between the two other mortgages.
Many borrowers decide on the variable rate mortgage, because they want to be able to take advantage of lower interest rates and reduce their mortgage payments accordingly. Well, in theory this is a good move, but guess what, lenders do not always pass on the cuts in the base interest rate to their customers – at least not in its entirety. This is where tracker mortgages come into play.
A tracker mortgage guarantees to always follow the Bank of England’s base rate, both up and down. It should follow the base rate, maintain the same differential between the rate you pay and the interest rate set by the Bank of England. However, as with any financial detail, make sure that you read the fine print in your loan agreement, because some lenders have added the right to ‘review the tracking differential’ if it drops below a certain level and they you won’t be getting the entire benefit of lower base rates translated into your mortgage.
For example, for a tracker mortgage the differential between the variable rate and the base rate is usually much smaller than that of variable rate mortgages. For variable rate mortgages, the differential is normally about 1.5%, but with a tracker mortgage, it could be as low as 0.75%; which means that you are really getting the ‘market interest rate’ on your mortgage.
Even within tracker mortgages, there are different types available and it is important to pick the one that best fits your personal needs. There are basically three types:
However, it is important to keep in mind that interest rates can go up as well; which means that your payments for a tracker mortgage can go down as well as up.