Different Types of Mortgage Interest
Having looked at the variable rate, we will now consider a variation on that
type of mortgage. namely the tracker mortgage.
The Tracker Mortgage
The tracker mortgage is a variable rate mortgage that is also based upon the Bank of England base interest rate.
However, the tracker mortgage is set to be much closer to the Bank of England Base Rate. It can often be only a fraction of one percentage point above the Base Rate. Unlike the variable rate mortgage, the tracker mortgage can be limited to a fixed term. Alternatively, it can be set for the lifetime of the mortgage.
Bearing in mind that the interest rate differential between Bank Of England Base Rate and variable rate mortgages compared to Base Rate and tracker mortgage rates is virtually always significantly higher, one might ask why borrowers offer the base rate tracker mortgage in the first place.
The answer to that question is a straightforward one. In times of hardship, recession, depression or economic uncertainty, where the public is reluctant to enter into debt, particularly significant long term debt such as a mortgage, borrowers have to go to the market with deals that might persuade them to borrow despite all their reservations. Although the tracker mortgage is susceptible to the fluctuations in the Bank of England Base Rate, over which the borrower has no control, the beneficial interest rate and the important feature that the borrower will reduce the interest rate immediately following a reduction in base rate by the Bank of England can make it an attractive proposition, particularly if interest rates fall during the tracking period.
We have so far discussed variable rate mortgages and fixed rate mortgages of varying types. The
next mortgage we will consider is a mixture of the two, allowing for some variation but providing protection against significant rises in the Bank of England Base Rate.
This is known as the Capped Mortgage.
The Capped Mortgage
The capped mortgage is basically a variable rate mortgage that is based upon
the Bank of England base interest rate. However, the capped mortgage
has a built in protection against significant increases in the Base
Rate.
The capped mortgage works like this. The borrower takes out a mortgage which is similar to the variable rate mortgage, in the sense that the interest rate applicable to the mortgage is tied to the rises and falls of the Bank of England Base Rate, as set by the Bank of England Monetary Policy Committee from time to time.
However, unlike the usual variable rate mortgage, there is a lever above which the interest on a capped mortgage cannot rise. In periods where interest rises dramatically, the capped mortgage provides the borrower with a buffer, whilst still allowing him to benefit from reductions
in the base rate.
The benefits of the capped mortgage are obvious. It should be said,
however, that they can be hard to find and that they can also be
relatively expensive to obtain and, frequently, the interest rate
offered (the differential between base rate and mortgage rate) can appear prohibitive. Nevertheless, they must be seen as potentially a good deal to investigate.
Next