There are many types of mortgage and it is worth understanding the differences between them before you choose one for you. Whether you are looking for your first mortgage or thinking of switching mortgages it is really important to make sure that you are able to use the mortgage that is most suitable to you. This should mean that you will get the best value for money form that mortgage. However, if you do not know what the mortgages are, then it will make it very difficult for you to choose between them. Many people understand the difference between the main two mortgage types – fixed and variable, but there tends to be some confusion when it comes to tracker mortgages. They are less common but still good to consider. Therefore it is worth finding out more about them and how they work.
What is a Tracker Mortgage?
A tracker mortgage is a type of variable mortgage. This means that the interest that you pay will vary and therefore it could go up or down and this means that the amount of money you pay each month will go up and down as well. Unlike a normal variable mortgage though, the interest rate is made up of two parts. There will be a fixed percentage that you always pay which will cover the mortgage companies’ costs and then you will also pay the base rate on top of that. The base rate is the mortgage rate set by the Bank of England. This rate has the potential to change each month as a panel of employee from the Bank of England will discuss what it should be. They generally will adjust the rate according to inflation, as they have a government target to keep inflation at a certain level and they will adjust the interest rate to try to influence inflation. Therefore, the rate of interest of the tracker mortgage could potentially change on a monthly level in line with what the Bank of England does.
Who Does it Suit the Best?
Some people like to know exactly how much they will be paying each month with regards to interest and they will benefit most from a fixed rate mortgage. However, if there are people that like the idea of a variable rate mortgage, because of the flexibility (you are tied in to a fixed rate) and the fact that it is often cheaper, then a tracker could be worth considering. There is one main advantage and that is because when the base rate is reduced, your mortgage rate will immediately go down. This is something that will never happen with a fixed rate and is not guaranteed to happen with a general variable rate mortgage. This means that there is a big chance that the tracker will be cheaper. Of course, as soon as rates go up, you will have to pay more with your tracker mortgage. However, it is very likely that any lender will put their rates up when the base rate goes up anyway, so that they can male more money, they are far less likely to put the rates down.
Therefore, if you want to try to take advantage of falling interest rates then a tracker mortgage could work for you. Obviously, you will need to check the priced and compare them to other types of mortgages to work out how they compare and whether they do look as if they will save you money or not. You will also be wise to think about what you think might happen to interest rates in the near future so that you can decide whether you will want to take advantage of them decreasing or protect yourself from them increasing. This is not easy to work out but if rates are low they are more likely to rise and vice versa, although you can never guarantee it.