Definition
A tracker mortgage is a type of home loan where the interest rate is directly linked to a specific benchmark, typically the base rate of the central bank. With this type of mortgage, when the linked rate rises or falls, the mortgage interest rate will change accordingly. It’s designed to ‘track’ the behavior of the specified rate, hence the name.
Key Takeaways
- A Tracker Mortgage is a type of home loan where the interest rate is directly linked to a benchmark interest rate, typically the Bank of England’s Base Rate. This means the rate you pay can rise or fall over the term of your mortgage as per the changes in the referenced interest rate.
- It is advantageous when the base rate is low as it directly reduces the cost of your mortgage. However, it can be risky if the base rate increases significantly as it will directly increase your monthly mortgage payments.
- Tracker mortgages usually offer lower rates than fixed-rate mortgages initially, but lack the stability of knowing what your future monthly payments will be. It is important to consider your personal financial situation before choosing a tracker mortgage to ensure you can handle potential increases in rates.
Importance
A tracker mortgage is significant in the financial world as it provides the borrower with predictable payment expectations based on changes in the market.
It is a type of home loan where the interest rate is directly related to a specific benchmark rate, typically the Bank of England’s base rate.
This aspect makes it different from fixed-rate mortgages, where the interest rate remains the same throughout the mortgage term.
A tracker mortgage can offer lower interest rates as long as the base rate remains low, which can lead to significant savings for the borrower.
Therefore, this specific feature makes the tracker mortgage favorable for borrowers who are open to taking risks with fluctuating interest rates to potentially save on cost in the long run.
Explanation
The purpose of a tracker mortgage is to provide a flexible loan option that synchronizes its interest rate with an external standard value or ‘base rate’, typically matching the base rate set by a central bank like the Bank of England or Federal Reserve. This means the mortgage repayments may fluctuate over time, but they directly mirror the wider economy’s interest rate behavior.
The major advantage of this type of mortgage lies in potential savings when the base rate decreases, as the tracker rate will descend as well, leading to lower payment amounts. Moreover, it can prove valuable for those prioritizing predictability in relation to the economy.
This is particularly true if the borrower believes that interest rates are likely to fall in the future. For those on a tight budget, a tracker mortgage may even allow you to make overpayments or finish your mortgage early without incurring a penalty.
However, it also exposes the borrower to potential risk if the base rate increases, as their mortgage rate and monthly repayments will increase accordingly. Thus, it is used for its flexibility and potential for savings, but requires careful consideration of the economic climate.
Examples of Tracker Mortgage
Barclays’ Trackit Mortgage: Barclays, a British multinational bank, provides a type of tracker mortgage known as the ‘Barclays Trackit Mortgage.’ The interest rate for this mortgage tracks a fixed amount above the Bank of England’s base rate. So if the central bank raises or lowers its interest rate, your variable interest rate will respectively increase or decrease, consequently affecting your mortgage payments.
HSBC Tracker Mortgage: HSBC is another bank known for offering a variety of tracker mortgages. Their rate typically follows the Bank of England base rate, thus adjusting accordingly. For instance, if the mortgage rate is set to be the Bank of England base rate plus 1%, and the base rate is
5%, then the customer’s mortgage interest rate would be
5%.
Nationwide’s Tracker Mortgage: Nationwide is one of the largest lenders in the UK that offers tracker mortgages. The rate of a Nationwide tracker mortgage follows the Bank of England base rate for a set period of two, three, or five years. This means it goes up and down in line with changes in the base rate, effectively mirroring any changes in the wider interest environment.
FAQs About Tracker Mortgages
What is a Tracker Mortgage?
A Tracker Mortgage is a type of home loan where the interest rate is directly linked to a particular base rate, typically the Bank of England’s base rate, plus a set percentage. This means that your mortgage interest rate will move up or down depending on the fluctuations of the base rate.
How Does a Tracker Mortgage Work?
With a Tracker Mortgage, the interest rate will change in line with the base rate. If the base rate increases by 1%, then your mortgage interest rate will also increase by the same amount. Similarly, if the base rate decreases, your mortgage interest rate will decrease as well.
What are the Benefits of a Tracker Mortgage?
The main benefit of a Tracker Mortgage is that if the base rate falls, so will the interest rate on your mortgage. This can potentially save borrowers a significant amount of money on their mortgage repayments. This type of mortgage also tends to come with lower early repayment penalties.
What are the Risks of a Tracker Mortgage?
The main risk of a Tracker Mortgage is if the base rate rises significantly, so will your mortgage payments. If you’re on a tight budget and rates increase, it could make your mortgage payments unmanageable. It’s important to weigh up the potential risks and rewards before choosing this type of mortgage.
Is a Tracker Mortgage Right for Me?
Whether a Tracker Mortgage is right for you depends on your personal circumstances and risk tolerance. It could be a good choice if you expect interest rates to stay low or go down further. However, if you’re on a tight budget and an increase in rates could make your repayments unaffordable, it might be better to go for a fixed-rate mortgage instead.
Related Entrepreneurship Terms
- Interest Rate
- Base Rate
- Mortgage Lender
- Loan-to-Value Ratio (LTV)
- Early Repayment Charge
Sources for More Information
- Investopedia: Investopedia is a leading source of financial content on the web, offering a wide range of educational information and resources, including a detailed section on mortgage options such as tracker mortgages.
- The Money Advice Service: This is a free and impartial service set up by the UK government, offering advice on all things finance, including mortgage types and comparisons.
- Bankrate: Bankrate provides comprehensive, authoritative, and up-to-date personal finance information. It has various tools, tips, and advice about different kinds of mortgages and financial situations.
- Financial Times: The Financial Times offers global and UK finance news, analysis, and opinion. It often has in-depth articles about the financial and housing markets, including mortgages.
