A tracker mortgage has a variable interest rate that changes depending on an external interest rate, usually the Bank of England base rate with a set margin added. This means that if the base rate goes up, your monthly payments will increase as well, and if it goes down, they will decrease too.
What's Included?
How do tracker mortgages work?
Tracker mortgages are variable-rate mortgages that change monthly payments to match any Bank of England base rate fluctuations. However, discounted mortgages are also variable-rate mortgages linked to the lender’s standard variable rate but sold at a discount. It is important to note that tracker mortgage rates usually modify the following month after any base rate adjustments.
There are currently some great mortgage deals available for people with tracker mortgages because the Bank of England base rate is low, leading to a period of low-interest rates.
If you’re considering getting a tracked mortgage, remember that your monthly payments may increase if the Bank of England decides to raise the base rate. On the other hand, if you want more predictability with your budget, you may want to consider a fixed rate mortgage. With a fixed rate mortgage, your payments will stay the same for a specific period.
It is important to be prepared for higher payments at any time as it is uncertain when the Bank of England will raise the base rate. Some tracker deals have a ‘floor’ that won’t go below when the base rate falls, so your payments may not drop below a certain level. Additionally, if you want to pay off your mortgage early or switch to a different deal during the tracker period, be aware that Early Repayment Charges (ERCs) may apply.
How long do tracker mortgages last?
You can choose the length of your tracker mortgage, which usually ranges from 2 or 3 years to the full length of your mortgage term. Once your deal ends, you will usually be moved to your lender’s standard variable rate (SVR) unless you decide to switch to another type of mortgage deal, such as another tracker mortgage or a remortgage.
What is an interest rate collar?
Tracker deals may have an interest rate collar, a minimum limit your payments won’t fall under. This means that even if the Bank of England cuts the base rate and it goes below this collar, your payments will not decrease beyond a certain level.
What is a lifetime tracker mortgage?
Tracker mortgages come in two types: lifetime and non-lifetime. Lifetime tracker mortgages track an external interest rate, usually the Bank of England base rate, for the entire loan duration. On the other hand, non-lifetime tracker mortgages are only linked to the base rate for a specific number of years before they return to the lender’s standard variable rate unless you decide to switch to a new deal.
With a lifetime tracker mortgage, you don’t need to be concerned about the end date of your deal since it will remain valid throughout the entire mortgage term.
Tracker mortgage rates with a lifetime duration typically have a slightly higher rate than those with shorter terms. Nonetheless, in the long run, this option may be more economical since there is no need to frequently remortgage when your deal expires. Moreover, it helps avoid additional mortgage arrangement fees and other related expenses.
If you switch from your lifetime tracker mortgage before it ends, you might have to pay Early Repayment Charges (ERCs).
What is a Buy Let tracker mortgage?
Both residential and Buy to Let mortgage-seekers can opt for Tracker mortgage deals. However, landlords opting for the latter must be ready to handle the possibility of increased mortgage payments in case the Bank of England raises the base rate. Thus, they must ensure that the rental income is sufficient to cover the potential rise in payments.
Before proceeding, if you are unsure if this deal suits you, seeking professional advice is recommended.
What is the difference between a tracker mortgage and a variable mortgage?
After your mortgage deal ends, your lender may move you to their standard variable rate (SVR) mortgage, which they can adjust anytime. In contrast, a tracker mortgage’s rate fluctuates with an external rate, like the Bank of England base rate. Check out our guide ‘What is a variable rate mortgage?’ to learn more about variable mortgages.
Should I choose a fixed or tracker rate mortgage?
A fixed rate mortgage means that your monthly payments will remain the same throughout the loan term, whereas a tracker-rate mortgage means that your monthly payments may increase or decrease depending on changes in the Bank of England’s base rate. As the tracker rate is variable, an increase in the base rate will cause your monthly payments to increase, while a decrease in the base rate will result in lower payments.
A fixed rate mortgage means that the interest rate remains the same throughout the agreement, resulting in consistent monthly payments regardless of fluctuations in the base rate. However, due to their certainty, fixed-rate mortgages typically come with a slightly higher interest rate than tracker-rate mortgages.
If you choose a tracker mortgage, you may have lower payments than a fixed rate mortgage if the Bank of England keeps the base rate low during your mortgage term. But, if the base rate rises during this time, your payments may become higher than they would have been with a fixed rate mortgage.
Can I switch from a fixed rate to a tracker rate mortgage?
If you want to switch from a fixed rate mortgage to a tracker deal before the fixed deal ends, you may need to pay Early Repayment Charges (ERCs). These charges can be quite high and might cancel out any financial gain you could get from switching. To ensure that switching is worthwhile, it’s important to do your calculations carefully. Also, seeking guidance from a mortgage broker before making any changes to your mortgage is recommended.
What are the advantages of a tracker mortgage?
Tracker mortgages offer various advantages, with one of the main ones being highly competitive introductory rates that may be lower than other mortgage deals. This is due to the exceptionally low base rate over several years, which makes it desirable for borrowers who seek affordable monthly repayments. However, there is no assurance that the rate will remain low in the future.
One advantage of this mortgage is that your payments will only increase by the same amount as any increase in the base rate during the tracker period. In addition, if the base rate drops, your monthly mortgage payments will decrease even more, allowing you to make additional payments which can ultimately lower the amount of interest you pay over time.
What are the disadvantages of a tracker mortgage?
This type of mortgage has some drawbacks. The main one is that since tracker rates are variable, your payments can increase or decrease, which can strain your finances. People buying a home for the first time or those with limited budgets may prefer the certainty of monthly fixed payments. Additionally, it’s important to note that there is typically no cap on how much your rate can increase.
If you opt for a tracker mortgage with a rate cap, you’ll typically pay a higher rate but be reassured that your rate won’t exceed a specific limit. However, if your mortgage deal has a collar, your rate won’t go below a certain level. This means that you won’t receive any additional reductions in your rate even if the base rate decreases further after the collar is reached.
Remember that leaving your mortgage early could result in high charges, especially if you want to pay off the mortgage or switch to a new deal.
What happens when your tracker mortgage ends?
When your tracker mortgage expires, you automatically switch to your lender’s standard variable rate (SVR). This rate is typically higher than other mortgage rates. It might be a good idea to consider remortgaging to another tracker mortgage or a different type of mortgage, like a fixed-rate one, when your current deal ends.
Is a tracker mortgage right for you?
Deciding if a tracker mortgage suits you depends on your situation and how long you plan to stay committed to a specific deal. The top tracker mortgages may not be the ones that closely follow the Bank of England Base Rate. It’s vital to consider additional expenses, such as mortgage arrangement fees, which can increase the total cost of a deal in addition to the advertised rate.
