Base Tracker Mortgages

What are base rate tracker mortgages?

If you have been on a variable rate mortgage for a while, you may have experienced the fact that lenders do not always pass on every cut in the Bank of England base rate. In particular, they don't do this with the almost missionary zeal with which they pass on base rate rises! Lenders justify this behaviour by pointing out that they have responsibilities to both borrowers and savers. This is true, but it is very likely that they are lending more money than they have saved in their accounts, so its the lenders who benefit most from this policy.

If you want to make sure that your mortgage absolutely follows the behaviour of the base rate, then you can take out one of the newer types of products on the market, the tracker mortgage, which will always follow the base rate. At least, though, you can follow the news, which will tell you what the Monetary Policy Committee might do. With a variable rate mortgage, you will suddenly find out the rate is going up when they put it up.

A further advantage of the tracker mortgage is that the difference between the variable rate and the base rate is usually a lot smaller than the margin between the ordinary variable rate mortgage and the base rate. With a variable rate mortgage, the margin is around 1.5%, but with a tracker the payable rate could be below the base rate or slightly above it. Those people who took out a tracker mortgage when the base rate was 6% about 2 years ago have thus enjoyed a constant lowering of their payments as the base rate stands at 4%.

There are a few variations in the type of tracker mortgages available. For instance, there is the lifetime tracker, which will track the base rate for the entire life of the mortgage. Then there is the tracker running for a set period at an agreed margin above or below the base rate and then moves to the lender's standard variable rate. Then there are trackers in which the lender makes a commitment that the difference between the base rate and the mortgage pay rate will not exceed a certain level.

Although tracker mortgages seem foolproof, you still need to be on your guard and make sure you read the small print on the mortgage, where an opt out clause could be hidden. For instance, some lenders will guarantee that the pay rate will not rise over 1% above the base rate, yet the small print states that in exceptional circumstances the company can waive the guarantee.

You should watch out for redemption penalties and understand that trackers make budget planning difficult.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2009

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