Adjustable mortgage rates

Adjustable Mortgage Rates

Adjustable mortgage rates (sometimes called tracker mortgages) are applied to mortgages to create a rate which fluctuates dependent on various factors such as the London Interbank Offered Rate, (LIBOR rate). Lenders do sometimes create their own cost of funds to use as an index but those lenders are few and far between.

Why have a Tracker or Adjustable Rate Mortgage

The reason behind this type of mortgage is to pass on part of the interest rate risk to the borrower rather than the mortgage lender, and if the interest rates fall this will benefit the borrower in that their monthly repayments will fall. However if the interest rates rise then the borrower will be paying a higher monthly instalment.

Risk wise, adjustable rate mortgage loans work opposite to a fixed rate mortgage as if the borrower takes a fixed rate mortgage and the interest rate falls, then their repayment will remain the same and the mortgage provider will in effect be making money. If the mortgage rate rises then the mortgage payments will again stay the same and the mortgage lender will not be making as much profit. As you can see there are risks from both sides, but as consumers we only really see the risks as being ours and do not really consider the position of the mortgage lender.

When choosing a mortgage you do need to take many factors into account, interest rates and risks being two of the major factors.

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Updated on 23rd February, 2009

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