This may be your very first property purchase, or it could be yet another purchase in your already expanding property portfolio. Whatever the circumstance, if you plan on getting a mortgage in the UK, then you will have to evaluate the type of mortgage you choose to go with.

In this article we look at Tracker Mortgages. This type of mortgage offers some unique options for borrowers. But is it the right choice for you?  This blog looks at these options and what benefits you stand to gain from it. Read on, to find out if a tracker mortgage will work for you or not.

 What are Tracker Mortgages?

Unlike traditional fixed-rate mortgages or Standard Variable Rate mortgages, where the interest rate remains constant for a set period, or varies according to a lenders rate, tracker mortgages directly follow the Bank of England base rate. This would mean that your mortgage interest rate fluctuates according to the base rate of the bank.

 Benefits of Tracker Mortgages:

Potential for Lower Rates:

If the base rate provided by the Bank of England is low, you could enjoy a lower interest rate. In comparison, you will not be able to get this low interest rate if you were on a fixed-rate mortgage. Tracker mortgages can translate to significant savings on your monthly repayments due to the variations designated by the Bank of England.

 Flexibility:

Tracker mortgages offer more flexibility when compared to other mortgage options. If you opt to a short term tracker mortgage, which is termed as an Introductory period (usually 1 - 5 years), when it ends, you will be switched to a Standard Variable Rate (SVR) and could end up paying more than what you bargained for. To avoid this, when your introductory period for the tracker mortgage ends, you have the flexibility to choose another option such as a remortgage on the property, go for a fixed rate mortgage or even choose another lender.

 Transparency:

With tracker mortgages, the base rate offers come with complete transparency. You know exactly how your interest rates will change based on the Bank of England announcements.

 What are the drawbacks of Tracker Mortgages?

Interest rates fluctuation:

The biggest downside of tracker mortgages is the uncertainty surrounding future interest rates. If the bank base rate rises, your mortgage payment instalments will increase, thereby putting a strain on your finances.

 Limited predictability:

If you are a business owner who relies solely on the sale of goods or services, budgeting for a tracker mortgage can be tricky. The fluctuation of interest rates makes it difficult to predict your long-term financial commitments.

 Exit fee:

Some tracker mortgages come with Early Repayment Charges (ERCs) if you want to switch to a different mortgage product before the introductory period ends. This could mean that you end up paying a penalty. Check with your lender before you decide on embarking on a tracker mortgage, how much it will cost in the event of settling the mortgage early or switching to another.

Who Should Consider a Tracker Mortgage?

If you are confident that interest rates will remain stable or even decrease in the near future, a tracker mortgage could be a good option to secure a potentially lower initial rate.

For borrowers who value the ability to switch to a fixed-rate mortgage if needed, a tracker mortgage with a short introductory period might be suitable. A tracker mortgage requires a certain level of financial resilience or capacity. If you can comfortably manage potential interest rate hikes, a tracker could be a good fit.

Who Should Avoid Tracker Mortgages?

If you prefer the security of knowing exactly what your monthly repayments will be for a set period, a fixed-rate mortgage might be a better choice.

Another reason not to go for a tracker mortgage is, if your budget is already stretched. The fluctuating nature of tracker mortgages could create financial strain if interest rates rise. If you’re a first-time buyer, your reserves might be limited. If this is the case, you could be faced with losing out if interest rates escalate.

Making an Informed Decision

Before opting for a tracker mortgage, it is crucial to consider your financial situation, risk tolerance, and market outlook. Consulting a qualified mortgage advisor can help you compare different mortgage options and assess your suitability for a tracker mortgage.

At BVS Mortgage and Financial Services, our highly experienced mortgage advisers will be able to provide you with the much-needed guidance before you decide on a tracker mortgage.

Conclusion:

Tracker mortgages can be a valuable tool for borrowers who are comfortable with potential interest rate fluctuations and believe rates might remain low or even decrease. However, they are not a one-size-fits-all solution.

Carefully weigh the pros and cons and seek professional advice to determine if a tracker mortgage aligns with your financial goals and risk tolerance. By staying informed and making the right decisions, you can maximise the mortgage product that works for you and help you achieve your homeownership dreams.

* Approved by the Openwork Partnership on 22.05.2024