A tracker rate mortgage is a type of variable rate mortgage where the interest rate is linked to the Bank of England’s base rate (or another specified rate), plus a set percentage. Unlike fixed rate mortgages, the interest rate on a tracker mortgage can go up or down, which means your monthly payments can change throughout the term of the mortgage.
Key Features of a Tracker Rate Mortgage:
- Linked
to Base Rate:
- The
interest rate is typically described as "Base Rate + X%". For
example, if the base rate is 0.5% and your tracker mortgage is set at
Base Rate + 1%, your interest rate would be 1.5%.
- Variable
Payments:
- Your
monthly payments will fluctuate in line with changes in the base rate. If
the base rate goes up, your payments increase; if it goes down, your
payments decrease.
- Initial
Period:
- Tracker
mortgages often come with an initial period, such as 2, 3, or 5 years,
after which the rate may switch to the lender’s standard variable rate
(SVR).
- No
Early Repayment Charges (ERCs):
- Some
tracker mortgages have no ERCs, offering more flexibility if you want to
repay the mortgage early or switch deals.
Advantages:
- Potential
for Lower Payments:
- If
the base rate decreases, your mortgage payments will reduce accordingly.
- Transparency:
- The
rate changes are straightforward and directly linked to the base rate,
making it easy to understand how your payments are calculated.
- Flexibility:
- Often
more flexible with fewer penalties for early repayment compared to fixed
rate mortgages.
Disadvantages:
- Uncertainty:
- Payments
can increase if the base rate rises, making budgeting more challenging.
- Higher
Risk:
- There's
a risk that your payments could become unaffordable if the base rate
rises significantly.
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