Currently hot 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 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 at the same time. Usually you agree with your bank what the difference will be between the base rate and the interest rate you are being charged.
So why are these tracker rates popular and could we be expecting to see more people taking them out when they remortgage, or are they a huge financial risk? They are popular for those home owners that are willing to place a financial 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 repayments will be. They are suitable for those wanting to gamble that interest rates will go down in the future and if they do go up, they can 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 does come with a huge monetary 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 mortgages are going to find repayments suddenly shooting up.
At the moment there doesn’t seem too much of an attraction or benefit 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 than they currently stand. 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 currently so low at the moment, banks have bumped up the interest increment that liesbetween 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 risk that tracker rate mortgages could be becoming very expensive.
There is also the issue that some lenders have placed a lower limit on how far down tracker rate mortgages will follow the base rate and in some cases, the base rate has already fallen below this limit. Therefore, the 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 legitimate or should be stopped. Time will tell.
If you think that loan interest rates could drop further and are happy that if they rise in the future you will immediately be paying moreeach month , then tracker mortgage rates might be the mortgages for you. Check first with a mortgage broker that you have fully understood the associated risks.
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