Tracker Mortgages
This is a variable rate that is linked to the movement of a prevailing rate such as The Bank of England Base Rate or London Interbank Offered Rate (LIBOR). The pay rate will be a set percentage amount above or below the relevant base rate for a specified period of time. For example if the tracker mortgage is set at 1% above The Bank of England Base Rate for 5 years and the base rate for example is currently 4.75%, the pay rate will work out at 5.75%. If it is set at 1% below and the base rate is currently 4.75% then the rate will be 3.75%.
As their name suggests the rates of tracker mortgages change to follow ‘track’ changes in the base rate to which they are linked.
Whilst the discounted and capped rate mortgages are both linked to the mortgage lender's Standard Variable Rate (SVR), tracker mortgages leave out this middle man and track the Bank of England base rate directly. For example, your tracker mortgage rate may be set at 1% above base rate. The advantage here is that should the base rate be cut, you will benefit immediately as you don't have to wait for your mortgage lender to decrease his SVR. Of course, base rate rises are also reflected in your mortgage rate straight away.
Like the discounted rate mortgage, you can't predict how much your monthly mortgage payments will be if rates rise, so trackers are not a good choice for those on a tight budget. However tracker mortgages can be a great way to benefit immediately from any future interest rate cuts.