Over 8.4 million home owners in the UK do not understand how a tracker mortgage affects monthly payments, research from Alliance & Leicester Mortgages reveals.
And only 34% know the interest rate on a tracker mortgage is linked to the Bank of England base rate. Almost one in five think trackers mean monthly payments are linked to the FTSE 100 index and 4% believe trackers mean monthly payments are fixed.
A&L says not understanding what a tracker mortgage is means many home owners could be unaware of an option that could keep their monthly payments down.
Stephen Leonard, director of mortgages at Alliance & Leicester, says: It is quite worrying to think such a large proportion of home owners are unaware of what a tracker mortgage is and how it could save them money on their monthly mortgage payments. There are certain advantages to choosing a tracker mortgage, especially with current low interest rates. However, home owners should ensure they fully understand what type of mortgage they have – they can then be financially prepared should their monthly payments rise.
Leonard adds: Tracker mortgages generally suit those who have a degree of flexibility in their budget and so stand to benefit from cuts in their monthly mortgage payments following a base rate cut, as well as afford any increases. While it is understandable that there are more non-home owners who got the answer wrong, this includes those who are looking to get on the property ladder in the near future. It is important they seek advice from a qualified mortgage adviser to ensure the mortgage they choose will be right for their individual circumstances.
The research also found men are more knowledgeable about tracker mortgages, with 34% getting the definition right, compared to 27% of women.
Of the key first-time buyer age range of between 30 and 39 years, 61% do not understand what a tracker mortgage is.
Those in the North-East are the most clued up about trackers, with 42% picking the right definition of the mortgage. By contrast, 83% of those living in Wales did not know the right definition.