Tracker Mortgages – Are They Worth The Gamble?

Understanding Tracker Rate Mortgages

What is a Tracker Rate Mortgage?

A tracker rate mortgage is a type of variable-rate mortgage where the interest rate is set as a specific percentage above or below the Bank of England’s base rate. This arrangement typically applies for an initial period of a few years. Your monthly payments will fluctuate based on changes to the base rate, meaning they can increase or decrease over time.

Advantages of Tracker Rate Mortgages

One significant advantage of a tracker mortgage is that your interest rate is linked directly to the Bank of England's base rate, rather than your lender's Standard Variable Rate (SVR). This means your rate is influenced by an independent, national benchmark rather than potentially unpredictable lender decisions. Consequently:

• Benefit from Base Rate Drops: If the base rate falls, your mortgage payments will decrease accordingly.

• Protection from Lender Decisions: You won’t be affected by potential increases in your lender’s SVR, as your rate is tied to the base rate.

However, it is important to note that if the base rate rises, your mortgage payments will also increase.

Evaluating a Tracker Mortgage

Choosing a tracker mortgage involves assessing your expectations about future interest rate movements. While predicting the future is inherently uncertain, you can use current economic indicators and expert advice to make an informed decision.

Current Economic Climate

In recent years, the Bank of England's base rate has been relatively low, contributing to lower mortgage rates and providing a boost to the housing market. While some experts anticipate potential rate increases in the near future, concerns about a significant housing market downturn have so far proven unfounded.

If you believe the base rate will remain low or decrease further, a tracker mortgage might be an appealing option. Be aware, though, that switching mortgages or lenders before the end of the tie-in period could incur substantial penalties. Tracker mortgages generally have fewer penalties compared to other types of mortgages.

Who Should Consider a Tracker Mortgage?

The suitability of a tracker mortgage depends largely on your financial situation and tolerance for payment fluctuations. If you are comfortable managing varying monthly payments and confident in your ability to handle potential increases, a tracker mortgage could be a worthwhile choice.

The Bank of England regularly reviews economic conditions and adjusts the base rate to either stimulate the market or control inflation. For up-to-date information on base rate changes and economic assessments, you can consult the Bank of England’s website at www.bankofengland.co.uk.

In summary, a tracker rate mortgage offers a variable interest rate tied to the Bank of England's base rate, providing potential benefits during periods of low rates while also exposing you to risks if rates rise. Assess your financial stability and consult current economic forecasts to make a well-informed decision.