Tracker Mortgage

With the Bank of England base rate at 0.5%, tracker mortgages have become increasingly popular with home buyers in recent years.

Since the interest rates on tracker mortgages are usually linked to the base rate, they often work out cheaper than other types of mortgages when the base rate is low.

A tracker mortgage is usually worked out as the base rate plus a certain percentage - perhaps 1.5% to 3%.

However, it is not always tied to the base rate. In some instances, it can be linked to LIBOR (the London Interbank Offered Rate), which is the rate that banks use to lend to each other.

You need to understand how more you'll be paying above the base rate on your tracker. This way, you know what to expect if the base rate then goes up.

Any change in interest rate is usually passed on to borrowers on tracker mortgages within 30 days.

Am I the right type of person to get a tracker mortgage?

Tracker mortgages can be an incredibly canny way of keeping interest payments low, so long as the base rate doesn't rise during the term of the mortgage.

Unfortunately, it can be extremely difficult to predict what the base rate will do – even economists struggle to make accurate forecasts. Therefore, you need to be prepared to shoulder higher interest payments if the base rate does go up. The minimum length of time for a tracker is two years, so borrowers need to be confident that if the base rate does rise, they can manage the increase. This option will not suit borrowers who like to know exactly how much they will pay on their mortgage every month and can factor this into their household budgets. 

You also need to look at the impact of the fees, which can be applied to all types of mortgages. Sometimes, high fees can make certain tracker deals more expensive in the long run, but some lenders will waive these fees when they're trying to attract new borrowers.

Lenders sometimes reserve the right to stop tracking base rates if they fall below a minimum level. This type of tracker mortgage collar is one thing to be aware of.

On the plus side, some tracker mortgages have caps, which mean they promise not to follow the rates if it reaches a maximum level.

You also need to check whether there are early repayment charges (if you want to get out of the deal before it comes to the end) and how punishing they are.

These are particularly important with tracker mortgages, as it can be worth it to pay the charge if rates shoot up and you would be better off switching to a cheaper deal.