Definition of Tracker Mortgages
Using an adjustable-rate mortgage can provide you with a way to take advantage of low market interest rates. One such mortgage that is available in the United Kingdom is the tracker mortgage. With this particular type of adjustable-rate mortgage, you will get a rate that moves with the base rate from the Bank of England.
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Changing Rate
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With the tracker mortgage, your rate moves with the fluctuations in the interest rate of the Bank of England. The interest rate of the Bank of England changes frequently, and your interest rate resets once every month. This means that every month, your payment fluctuates from the previous month's payment. When interest rates drop, this can work to your advantage. If interest rates increase, it can significantly raise your payment for the month.
Margin
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Although your interest rate is tied to the interest rate of the Bank of England, that does not necessarily mean that the interest rate on your mortgage will be the same as their rate. The rate that you pay is usually a little bit higher than the rate that the Bank of England offers. The difference between your rate and the rate of the Bank of England is referred to as the margin. The size of the margin depends on your credit history. If you have a solid credit history, the margin will be lower.
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Length of Tracking
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With a tracker loan, your interest rate will not track the rate of the Bank of England for the entire life of the loan. Most of these loans track the rate for a certain number of years and then lock into a fixed rate for the remainder of the term. Different tracker mortgages tracks the rate for two years, five years or 10 years. In some cases, you can obtain a loan that tracks the rate for the entire term of your mortgage.
Considerations
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Using this type of loan can be extremely risky as a homeowner. When you sign up for a tracker mortgage, you may be tempted to do so because of the low market interest rates at the time. The initial rates are generally lower than what you get with a fixed-rate mortgage. The problem with these mortgages is that you could have a significantly higher loan payment in the future. You really do not know what to expect when it comes to market interest rates, and it could produce a payment that you cannot afford every month.
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