There are several different types of methods for interest to be charged on mortgages. Tracker mortgages have a variable interest rate that moves roughly in line with the Bank of England Base Rate (BoEBR).
Another popular type of interest rate is a fixed rate which does not move in line with the base rate.
The interest rates on tracker rate mortgages are quoted as a fixed percentage above the base rate and will normally exist for a short period, although it can be attached to the tracker rate mortgage for its entire term.
Once the tracker period expires the interest rate will convert to the lender"s Standard Variable Rate (SVR). A typical example would be tracker rate mortgages that are quotes as having an interest rate of BoEBR+2% for three years.
The BoEBR is set by the Bank of England Monetary Policy Committee (MPC) each month. The MPC will evaluate a range of economic indicators to decide whether a change in the base rate is necessary to meet the Government"s inflationary policies.
Because the interest rates attached to tracker mortgages are attached to the BoEBR, any movement will affect borrowers" monthly repayments. Upward movements in the BoEBR are usually passed onto borrowers within a few days and downward movements within a month.
Tracker rate mortgages therefore come with an inbuilt risk factor that borrowers must assess carefully. If a borrower cannot afford to continue making payments on tracker rate mortgages if the interest rate increases significantly over time, they may need to reconsider applying for this type of mortgage product.
Borrowers who do not want to be exposed to such fluctuations should consider applying for fixed rate mortgages instead of tracker rate mortgages. Fixed rate mortgage have interest rates that do not move each time the base rate is increased or decreased and therefore offer the borrower security.
However, if the base rate falls, borrowers of fixed rate mortgages will not be able to take advantage of the cheaper cost of borrowing. The interest rates on tracker rate mortgages will decline and borrowers of this type of product will subsequently save money.
If you are unsure whether tracker rate mortgages are right for you, contact an independent mortgage adviser for expert and impartial advice.