Tracker Mortgage

This type of mortgage was called so because it actually tracks the changes of Bank of England’s base rate. Tracker mortgage takes the base interest rate and adds a specified percentage to it. As a rule, the interest rate charged on a typical tracker mortgage is 1.0 per cent higher than the Base Rate. One can even find a tracker mortgage with the base rate and an extra 0.5%.

When the Bank of England base rate goes down tracker mortgage rate goes down in line with it, and, correspondingly, when the base rate goes up tracker mortgage rate goes up in line with it. The percentage charged above the base rate on tracker mortgages varies from lender to lender, but mostly depends on the term specified for the tracker feature. Loan to Value of the property is also taken into account by the lenders when they work out the percentage differential on a tracker mortgage. A property with a low Loan to Value has more chances of getting a low tracker interest rate, whereas a property with a high Loan to Value is unlikely to get lower interest rate differential.

Tracker mortgage allows borrowers to select a fixed period, for example three or four years, during which the mortgage interest rate will track the base rate. As soon as this period comes to an end the mortgage returns to the SVR charged by the lender.

Another option is a lifetime tracker mortgage, which depends on the fluctuations of the base rate for the entire term of the mortgage. However, in most cases the percentage charged above the base rate is slightly higher than on a mortgage with a tracker feature specified for a fixed term.

The major advantage of this mortgage type is that it can be called a type of discount mortgage. Despite the fact that mortgage providers add a certain amount to the base rate when it comes to tracker mortgages, it is usually not as high as on SVR-based mortgage, where most lenders apply about 2% to the base rate. In addition, when base rate decreases the discount will be applied to a tracker mortgage interest rate without delay, which doesn’t necessarily happen with a SVR mortgage.

However, a tracker mortgage has a number of disadvantages. One of them is an early redemption penalty charged by the lender when a borrower opts to leave the mortgage deal before the end of the term. One more important aspect is that it budgeting for tracker mortgages can be rather difficult because of the BOE's base rate fluctuations.


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