Tracker Mortgages
Unlike a Discount Mortgage where your mortgage interest rate is based on the lenders own Standard Variable Rate (SVR). A tracker follows the Bank of England Base Rate (BoEBR). This means that the rate you pay is determined not by the lender, but the Bank of England and therefore if the BoEBR drop the base rate your payments will fall in line with this rate drop. Equally if the BoEBR up there base rate, your payment will increase in line with this increase.
Check the small print though, some lenders will reserve the right to review the rate if the BoEBR drops below a certain level, effectively defeating the object of the product and how it works. They can also tie you in beyond the term of the deal by exercising ‘extended early repayment penalties' which could see you flipping up to the more expensive Standard Variable Rate (SVR). Its not uncommon for lenders to make it mandatory that you take out their insurance aswell.
In summary, there are no guarantees what your monthly payments will be if the BoEBR moves, but you may well find that because the initial rate is so low you can handle a few increases over the term of the deal.
Not ideal for borrowers on a tight budget who need consistency in mortgage payments, but can work out very cost effective for those who are willing to take a risk and can handle increased payments if the BoEBR increases.
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