Money Outlet

What is a base-rate tracker mortgage?

In basic terms a base-rate tracker mortgage is a mortgage with an interest rate that tracks the Bank of England’s base lending rate. Some tracker mortgage deals can be set for a limited period only after which they revert back to the mortgage lender’s standard variable rate or SVR. Others can run for the whole of the mortgage term and these are also referred to as lifetime tracker mortgages.

In general, most lenders will set their standard variable rate at around 2% over base which can be interpreted as a kind of discount deal. In an attempt to attract new customers the lender will offer a discount on their standard variable rate for a limited period, usually 2 years or so. This is a variation on an interest repayment. Payments will go up and down each time the Bank of England changes its base rate as will your interest rate but overall you will be paying slightly less. Once the limited period ends, your payments then switch to the lender’s usual variable rate.

Who should choose a tracker mortgage?

Each time the Bank of England’s Monetary Policy Committee alters the Bank’s base lending rate, a base-rate tracker mortgage will do the same thing. A tracker mortgage may be a suitable option for those who are positive and somewhat optimistic with regards to the long-term prospects for interest rates. As the Bank lowers its base rate so will you lender lower your interest rate.

It is worth noting that some lenders however will not adjust their interest rates for all other variable rate customers. In this case you may find you have to wait longer for your interest rate to be cut, or not have it cut, by the full amount as set by the bank of England’s base rate.

On the other hand, should the Bank of England increase its rate, you will find your interest rate will also rise accordingly and must be prepared to pay the increase to your mortgage repayments. In this case those who are already living on a tight or limited budget should not opt for a tracker mortgage. The alternative option would be to go for a fixed-rate mortgage deal and have the peace of mind that you can comfortably cover your monthly repayments.

When to choose a tracker mortgage?

Since the interest rates on a tracker mortgage will either rise or fall, depending on the direction of the base rate, they are therefore a potentially good choice for anyone considering a mortgage during a period where interest rates are falling.

In some cases a discount tracker mortgage may work out to be cheaper than a fixed-rate especially when rates are on the increase. This is because for many it may already be too late to switch over to a cheap fixed rate by the time the interest rates have risen. Naturally all mortgage lenders are out to make a profit, so in the case where they feel more people might be inclined to go over to a fixed-rate mortgage, they will simply raise their interest rates.

If you have opted for a discount tracker mortgage and the interest rate is set at 0.25% or even 0.5% less than the cheapest available fixed-rate, then ultimately an increase in the Bank of England’s base rate, of say the same percentage, will not leave you paying extra on your mortgage payments.

Ultimately, opting for a tracker mortgage is a personal choice and is a decision that can only really be made depending on how you feel about which way rates will go. Should they rise you will of course pay more but if they fall your payments should do likewise.

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