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Know your mortgage: Tracker rate mortgages

Row of houses with mortgage signYet another type of variable rate mortgage, tracker rates move up or down in direct relation to The Bank of England Base Rate rather than a lender’s Standard Variable Rate (SVR).

For example, if your mortgage tracks The Bank of England Base Rate by plus 2%, assuming the Base Rate is 0.5%, you would pay 2.5% for the period of the tracker. Of course, after the tracker period ends (typically one to five years), interests rates would revert to the SVR.

The attraction of Trackers is that Base Rate interest cuts are passed on to the borrower straight away, whereas there’s often a delay in passing on SVR reductions.

Tracker Rate Mortgages often come with an arrangement fee or Early Redemption Charge (ERC).

The Credit Crunch and Mortgages: When interest rates plummeted to record lows in early 2009, one group of homeowners couldn’t believe their luck. In mid 2007, some borrowers took out a tracker deal with Cheltenham & Gloucester which benefited from an introductory mortgage rate of the Bank of England Base Rate minus 1.01%. So, ever since February 2009, when rates hit 1%, those fortunate borrowers, in theory, became entitled to be paid interest from their lender. Now that’s a mortgage deal!

Next - Part 13: Flexible Mortgages