Currently in the financial news a lot of recent times are the tracker rate mortgages. The theory goes with these tracker mortgages that they will exactly follow the Central Bank’s announced base rate moves. Every time it announces 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 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 place a financial gamble on interest rate changes and are more happy to see their interest rate change and benefit from future 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 overall in the future and if they do go up, they can afford to make the repayments. Maybe they have other investments that if interest rates go up will be earning them more income, so the net result isn’t an issue.
This type of mortgage does come with a huge risk. If the central banks suddenly decide that the best way to climb 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 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. Yes, there is still some 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 so low at the moment, banks have bumped up the 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 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 down tracker rate mortgages will follow the base rate and in some cases, the base rate has already fallen below this enforced limit. Therefore, the restriction has been triggered and the tracker interest rates are not following. Financial authorities are not 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 more, then tracker mortgage rates might be for you. Check with a local mortgage broker that you have fully understood the associated risks.
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