Introduction
Tracker mortgages are increasingly common. They are usually linked to the Bank of
England base rate, in that you pay a set margin above the current base rate level.
Unlike many of the other types of rate, most tracker rates will not revert to a
lender's SVR at any point during the life of the loan. They will continue to track
the base rate until you have either paid off your mortgage or switch provider or
product.
Advantages
There is no need to rely on your lender cutting rates in line with bank base rates,
which some don't necessarily always do immediately after an interest rate decision.
Your mortgage will never revert to the SVR, so you have some security in that you
will never be paying a highly uncompetitive rate.
It is quite common to find tracker mortgages that have discounts and stepped discounts
built into them, providing an added benefit. You may, for example, pay 0.75% below
the Bank of England base rate for 1 year, after which time the rate is guaranteed
to be not more than 1.75 % above the base rate for the remaining duration of the
loan. As with other stepped products, there can be numerous steps in the discount
before it settles at the final level and while pure tracker mortgages may be free
of redemption penalties, those with discounts attached will almost certainly not
be.
Disadvantages
As with other variable rates, you can be in for a rough and unpredictable ride,
particularly if the MPC were to make a series of rate increases. Any volatility
in interest rates makes it difficult to budget for mortgage repayments, thereby
making this type of rate unsuitable for some borrowers.