The #1 Secret to Tracker Mortgage Rates
Currently in the financial news a lot of recent times are the tracker rate mortgages. The theory goes with these mortgages that they will exactly follow the Central Bank’s announced base ratemoves. Every time it increases or decreases, the tracker rate mortgage product is expected to move in exactly the same wayat 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 tracker rates popular and could we be expecting to see many more people taking them outwhen they remortgage, or are they a huge financial risk? They are popular for those 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 overall in the future and if they go up, they can still afford to make the repayments. Maybe they have other suitable 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 payments 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 mortgages. With base rates already breaking the historic low, they can’t really be expected to fall much furtherthan they currently stand. 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 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 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 banks have placed a lower limit on how far down 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 interest rates are not following. Financial authorities are not happy with this and are looking into whether it is legitimate. Time will tell.
If you think that interest rates could drop even further and are happy that if they rise you will immediately be paying moreeach month , then tracker rate mortgages might be for you. Check with a mortgage broker that you have fully understood the associated risks.
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Posted by Carlos Sagastume on January 18, 2009. Filed under Tracker Mortgages.
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