A mortgage is perhaps the most powerful tool that will enable a consumer to own his or her own home. These are highly effective financial instruments, for they enable the individual to make a small down payment. In return, the mortgage lender will supply the remainder of the money needed to purchase a property.
A tracker mortgage is a specific type of loan whereas the interest to be paid will “track” the rates set by the Bank of England (normally one per cent above or below the current open market value). This scheme can be employed for various time frames and once it expires, the borrower will normally be transferred into a variable interest rate mortgage. The obvious advantage is that if interest rates are low, agreeable premiums can be enjoyed.
Types of Tracker Mortgages
Tracker mortgages are determined by the amount of money requested, the time frame of the contract and the associated interest rates. Thus, the main question is what the base interest rate margin is set at when applying for the loan. However, it needs to be recognised that this rate can be modified by the Bank of England. Longer tracker mortgages will therefore run a higher risk, as interest rates are known to fluctuate over longer time periods.
The size of the mortgage is also important, for concessions may be made in regards to the margin in comparison to the base interest rate. Assuming that the rates are low, the borrower will have the ability to overpay the mortgage; enabling the total repayment time to ultimately be shortened.
Things to Take Into Consideration
It is obviously important to look at the current interest rates offered by the Bank of England. Should one wish to purchase a tracker mortgage that will last for a number of years, future projections need to be taken into account. Also, the borrower should ask for an estimate of the rates to be expected once they leave the tracker mortgage and are placed into a standard variable rate plan. Finally, those who may potentially experience financial difficulties in the future may not be suited for a tracker mortgage; a fixed-rate option is safer.
How to Get the Best Deal
Providers will offer different margins above or below the base rate. So, these need to be carefully analysed before deciding upon the company. Additional concerns are:
- The future base interest rates.
- The length of time that the provider has been operating.
- The flexibility of payment options (such as an overpayment).
- The levels of transparency offered.
While there are indeed certain advantages with a tracker mortgage, all options need to be weighed in order to make an informed decision.