A tracker mortgage is very much like any other mortgage in most ways. However, whereas the standard variable rate mortgage interest rate is set by the lender, a tracker mortgage has its interest rate set with reference to in most cases, the Bank of England’s Base Rate.
The Bank of England reviews its base rate every month and sets the rate as a means of setting the cost of money banks ‘buy in’. As the rate rises lending rates are likely to follow. With a tracker mortgage the mortgage interest rate specifically tracks indices like the Bank of England Base Rate.
If the Tracker Mortgage interest rate is set at 2% above Bank of England Base Rate then if the Base Rate were to rise from 0.5% to say 1%, then the mortgage interest rate would rise accordingly from 2.5% to 3%.
At the time of writing (November 2015) the Bank of England Base Rate remains at an historically low 0.5%. Base Rates can rise for many reasons but generally, as the economy grows and inflationary pressures are felt in the general economy, the Bank of England will aim to gradually increase their Base Rate to control inflation and protect the value of the currency.
It’s worth noting that in most scenarios, a bank’s standard variable rate will probably rise and fall as the Bank of England’s Base Rate rises and falls anyway. But a Tracker Mortgage makes this link explicit.
For more information about tracker mortgages contact us or speak to a mortgage adviser on 01628 507477.
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