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What are the Risks and Benefits of a Tracker Mortgage?

Getting a mortgage is a way of borrowing money to buy a property. There are two contrary ways of achieving this objective, the fixed-rate loan and the tracker loan. Each has the potential to benefit you in completely different ways. A fixed-rate mortgage involves making the same payment for the entirety of the agreement, regardless of which direction the central bank moves base rates. This offers you repayment certainty. A tracker mortgage involves tracking the interest rate that's set by the Bank of England plus a margin. If base rates were reduced, the lender would be obligated to reduce the cost of borrowing for you. There are still tracker deals available at less than 2%.

Tracker Mortgage Considerations

The tracker mortgage is highly beneficial when interest rates have gone up to bring inflation within target and the economy is showing signs of growing too fast. Many homeowners and first-time buyers make the mistake of tieing themselves in at this time, but it can prove to be a costly mistake. As the economy weakens, the Bank of England reduces interest rates to prevent negative economic growth. The benefit to you is that each 0.25% base rate reduction will be passed on to you, so you'll have to find less money each month. Homeowners who entered a tracker deal have faired particularly well for the last 5 years, enabling them to pay off their mortgage that much sooner.

However, as with most things in life, getting the timing right is critically important. If you were to take out a tracker loan when interest rates were low and the economy was showing signs of growth, it would have some negative implications for your disposable income. Tracker loans can prove to be costly as base rates start to rise because you're not insulated from the effects of the global economy. Before entering this type of mortgage agreement, you need to make sure that you're in a position to make the repayments if base rates did go up. If you enter the size of your loan and term into a mortgage calculator, you can experiment with different interest rate figures to see how much you'd need to find.

Future of Tracker Loans

Given that the Bank of England has set base rates at half of a percent, there isn't a great deal of scope for further reductions. It could be argued that interest rates are far more likely to go up than go down. However, the UK economy isn't exactly showing many signs of growth at the moment, so base rates may stay low for quite some time. If you weigh tracker mortgage risks and benefits and do decide to select this type of mortgage, you need to consider whether a fixed-rate loan saves you more money over the next 5 years. It may cost you a bit more at the start, but it's likely to save you some cash as the economy starts to improve. It'll also give you far more certainty with respect to making the repayments on the loan.

What worked for you in the past isn't guaranteed to benefit you in the future. It's important that you keep a close eye on the UK economy because this has a major influence on which type of mortgage deal you should select. If you're not good with money or don't have a sound grasp of economics, you can always utilise the services of a mortgage broker. It'll cost you 1% of the loan's value to gain access to their advice, but their expertise could save you much more over the duration of the agreement.

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