What are tracker mortgage rates and who might tolerate the disadvantages?

Currently in the financial news a lot of recent times are the tracker mortgage rates. The theory goes with these mortgages that they will always exactly follow, or track, the Central Bank’s announced base rate. Every time it increases or decreases, the tracker rate mortgage is expected to move in exactly the same wayat the same time. Usually you agree with your lender what the rate difference will be between the base rate and the interest rate you are being charged.

So why are these popular and in the future could we be expecting to see many more people taking them out, or are they a huge financial risk? They are popular for those home owners that are willing to gamble on interest rate changes and are more happy to see their mortgage interest rate change and benefit from lowering rates, rather than having the financial security of knowing what future mortgage repayments will be. They are suitable for those homebuyers wanting to gamble that interest rates will go down in the future and if they do go up, they can still afford to make the loan repayments. Maybe they have other investments that if interest rates go up will be earning them more solid income, so the net result isn’t an issue.

This type of mortgage rate does come with a huge risk. If the central banks suddenly decide that the best way out of the current problematic financial situation is to quickly hike the base rates, then mortgage holders with tracker rate mortgages are going to find repayments suddenly shooting up.

At the moment there doesn’t seem too much of an attraction for new home buyers to take out tracker rate mortgages. With base rates already breaking the historic low, they can’t really be expected to fall much further. Yes, there is still room to fall, but not much. If a tracker mortgage is for a few years, then there’s a good chance that during that time interest rates could rise above current levels in that time. And with interest rates being currently so low at the moment, lenders have bumped up theinterest increment between the base rates and the interest rates that they are charging. Thus, when the central bank’s base rate eventually recovers, be it in the next year or in a couple of years, there is a good risk that tracker rate mortgages could be very expensive.

There is also the issue that some lenders have placed a lower limit on how far tracker rate mortgages will follow the base rate and in some cases, the base rate has already fallen below this enforced limit. Therefore, the lowest rate restriction has been triggered and the interest rates are not following. Financial authorities are not thought to be happy with this and are looking into whether it is legitimateor should be stopped. Time will tell.

If you think that loan interest rates could drop further and are happy that if they do rise in the future you will immediately be paying more, then tracker rate mortgages might be for you. Check first with a local mortgage broker that you have fully understood the risks.

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