Currently hot in the financial news a lot of recent times are the tracker rate mortgages. The theory goes with these tracker mortgages that they will always exactly follow the Central Bank’s announced base rate. Every time it increases or decreases, the tracker rate mortgage product is expected to move in exactly the same way. Usually you agree with your lender what the rate difference will be between the base rate and the interest rate you are charged.
So why are these popular and in the future could we be expecting to see more people taking them out when they remortgage, or are they a risk? They are popular for those that are willing to gamble on interest rate changes and are more happy to see their interest rate change and benefit from lowering rates, rather than having the financial security of knowing what future repayments will be. They are suitable for those homebuyers wanting to gamble that interest rates will go down in the future and if they go up, they can afford to make the loan repayments. Maybe they have other suitable 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 monetary risk. If the central banks suddenly decide that the best way out of the current financial situation is to hike the base rates, then mortgage holders with tracker mortgages are going to find payments 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 fall much further. Yes, there is still room to fall, but not much. If a tracker is for a few years, then there’s a good chance that interest rates could rise above current levels in that time. And with interest rates being so low at the moment, banks have bumped up the interest increment between the base rates and the interest rates that they are charging. Thus, when the 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 becoming very expensive.
There is also the current issue that some banks have placed a lower limit on how far tracker 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 tracker interest rates are not following. Financial authorities are not thought to be happy with this and are looking into whether it is legitimate. 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 mortgage rates might be for you. Check first with a mortgage broker that you have fully understood the associated risks.
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