A tracker loan is essentially a variable-rate loan. The interest rate for this type of loan will coincide with the Bank of England or London Interbank Offered rates. It won’t be identical to these rates, but instead will be 1%-3% points higher. The primary benefit of this type of loan is that the interest rate, when it is low, will typically be lower than the average fixed rate. However, there is a downside. The interest rate will eventually increase and sometimes even skyrocket. When it does the latter, a person may have difficulty paying their mortgage. Below we will take a look at when it’s best not to use a tracker loan.
a. When a person is on a fixed income: When a person is on a fixed income, they don’t have a lot of extra money, money that would be needed if their mortgage loan’s interest rate suddenly and significantly increased, which is a real possibility with a tracker loan. Individuals that don’t have a lot of money in their budget for “extras” should think long and hard before taking out a tracker mortgage loan.
b. When the Bank of England base rates are expected to increase: If the Bank of England’s base rate is predicted to increase, a tracker loan wouldn’t be a good choice. The best time to do so is when the rates are low and forecasted to stay low.
c. When a person is risk adverse: Individuals that are risk adverse are not good candidates for tracker loans. This is because they require borrowers to assume more risk then a fixed loan would require. A fixed loan’s interest rate remains the same and never changes for the entire length of the loan.
Tracker loans aren’t suitable for everyone. Individuals on a fixed or limited budget should avoid them. The same is true of people adverse to risk.