There are lots of differences between mortgages and it can be a good idea to have a good understanding of them if you have a mortgage already or if you are thinking of getting one. Then when you choose a mortgage or if you are thinking of changing your mortgage, you will have a good idea of what the different mortgage types are so that you can make a good choice when you are picking your mortgage. You may have heard of some of the differences, particularly if you have a mortgage already, but there are lot of people that do not know what a tracker mortgage is. It can be a really important thing to know as it could be just the right type of mortgage for you.
What is a Tracker?
A tracker is a mortgage which has a variable interest rate but also with a fixed part. This sounds confusing but basically the lender will charge you a fixed amount during the course of the loan. They will also add on the Bank of England base rate to that which is the variable part. This will ‘track’ the base rate, meaning that it will change when the base rate changes. The base rate if the Bank of England interest rate and they assess this each month. It can potentially change monthly, but generally it does not change every month. At the moment the government have set the Bank of England a task to keep inflation at around 2% and using various methods including altering the base rate to do that. If inflation goes too high, they will bring up interest rates so that people can’t afford to borrow as much and will therefore spend less and bring prices down due to a lowered demand for goods and services and if inflation grow too slowly they will reduce interest rates to encourage borrowing and spending. Lower interest rates also discourage saving as people will not bother to save their money if they do not get much interest but will save if they can get lots of interest.
When is it Useful?
So a tracker is useful in several ways. When the interest rate goes down, the interest you pay will fall when you have a tracker – that is guaranteed. However, if you have other types of mortgage then this will not be guaranteed. It is possible that if you have a variable rate then the lender will bring it down but they do not have so they may not do it. If you have a fixed rate then the rate will never change as it is always fixed at the same level.
If you predict that rates will fall, then this is a great time to get a tracker mortgage. However, predicting rates is not easy. Even expert economists get it wrong and this is because the economy is not always predictable. If England was in a bubble then it would be easier, but our economy gets impacted by world events as well events happening in England and so this can make it harder to know what might happen. No one tends to predict when market crashes will occur and we have had problems with banks, leaving the EU, a pandemic and lots of other things over the years that have had an impact on the economy which has an effect on spending which them impacts interest rates. It can be very difficult to guess what might happen.
If rates are low, then you might guess that they can only go up and perhaps a tracker will not be the best to get and if rates are high you might think they are more likely to drop and so it might be a better time for a tracker. This seems sensible but lately we have had historically low rates for a very long time and then they dropped even lower, so it just shows that even if things seem predictable it is not that easy.