> Tracker Mortgages - UK Guide
In a nutshell
A tracker mortgage is a variable deal linked to the Bank of England base rate (generally via a fixed rate percentage). Your mortgage payments vary according to any changes in this base rate.
Best Mortgage For
Any consumer that wishes to use base rates to control their mortgage payments to gain some stability of costs and to (hopefully) benefit from base rate drops.
A tracker is a variable mortgage where your interest rate will be fixed at a certain percentage - usually above base rate. So, whatever happens to the base rate, your payments will be calculated at your agreed percentage above it. It is also possible to build in fixed elements to a tracker too. Some deals, for example, will fix your percentage under base rate for a specific period which is usually set at 1-2 years+. You could also, as another example, have your tracker rate set at a capped rate so that it never exceeds a certain percentage over base rate for a specific period of time. Trackers are available for the life of your mortgage or as a short-term deal (after which you'll step back into a pre-agreed product). Some lenders, as an alternative, will give you a short-term fixed rate deal that then reverts to a tracker.
Typical Amount to borrow
Standard mortgage rulings apply here - this is currently set at an average of 3-4 times your salary for a single application and 2.5-3 times your salaries for a couple. You may be able to obtain higher salary combinations with some lenders.
Deposits will start at 5% depending on your lender. Some will allow you to borrow 100%+.
Most people take out a tracker product in the knowledge that they will save money if interest base rates fall. This could save you significant amounts over the course of your mortgage if things fall your way. Tracker rates changes are usually made as soon as the base rate itself changes so you'll benefit immediately if rates do drop.
What to look out for
Your biggest disadvantage here is that your payments will also go up immediately if base rates rise. You can cut your losses here by building a capped percentage into your tracker mortgage so you will at least know that you'll never have to pay too much. Lenders have, in the past, lost quite a lot of money through trackers as base rates dropped quite considerably. To protect their interests, therefore, many have now capped the tracker percentages on offer. So, if the base rate hits a certain percentage then they'll freeze your payments there until base rates rise again - this means that you won't benefit from any further drops in rates. You may also find that accepting a tracker deal ties you into the lender for a certain period. This can even exceed the period of your deal. Do be careful with tie-ins like this - if base rates shoot up, you may want to change deals and may be forced to pay a lot in redemption charges to do so.
Some lenders offer tracker products based on the LIBOR (London Inter-Bank Offered Rate) - this is the rate at which banks lend money to each other - instead of the Bank of England base rate. Some have taken this one step further to tap into lower rates in the USA and offer US LIBOR deals.