Tracker mortgages

Tracker mortgages go up and down in line with the Bank of England base rate – so they’re a popular choice of mortgage, especially when interest rates are low. But is it the right type of mortgage for you? Here’s what you need to know about tracker mortgages and how they work.

Tracker mortgages go up and down in line with the Bank of England base rate – so they’re a popular choice of mortgage, especially when interest rates are low. But is it the right type of mortgage for you? Here’s what you need to know about tracker mortgages and how they work.

Mark Gordon
From the Mortgages team
4
minute read
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Posted 14 JUNE 2021

What is a tracker mortgage?

A tracker mortgage is a variable rate mortgage, where the interest rate you pay is based on the official borrowing rate of the Bank of England – called the base rate. This means that your mortgage repayments can go up or down. It’s a variable-rate mortgage as the rate isn’t fixed and will change as the base rate changes. 

Tracker mortgages explained 

As a general rule, tracker mortgage interest rates don’t exactly match the Bank of England base rate – they’re usually set at a percentage above, then move up or down in line with the base rate. 

Let’s say your tracker mortgage is set at 1% above the Bank of England base rate. If the base rate is 0.1%, the interest rate on your tracker mortgage would be the base rate (0.1%) + the set percentage rate (1%) = 1.1%. 

Is a tracker mortgage right for me?

If you can find a tracker mortgage with a low set percentage rate, it can be good value – especially if the economy’s not doing so well. 

The Bank of England decides whether to change the base rate on the first Thursday of every month. But in recent years it hasn’t changed that much – it’s remained less than 1% for the past 10 years. Since the coronavirus pandemic, that’s dropped to a record low of just 0.1%. So, although the economy has taken a battering because of Covid-19, it does mean that tracker mortgage rates offer pretty good value at the moment. 

But remember, the base rate can go up. Once the economy starts to pick up, your interest rate may rise. If this happens, you’ll need to be sure you can afford your mortgage repayments. 

Your home may be repossessed if you do not keep up repayments on your mortgage. 

Tracker mortgages can be tricky when it comes to budgeting. If you prefer the certainty of knowing how much you’ll need to pay each month, then it’s not the mortgage for you – you might be better off with a fixed-rate mortgage

How long does a tracker mortgage last?

Tracker mortgages typically have an introductory period of between 1-5 years. After that, you’ll be put on your lender’s standard variable rate (SVR), which can often be much higher. 

When your tracker introductory period is due to end, it’s a good idea to look around at other mortgage options. You might want to consider remortgaging.

It’s also possible to find a lifetime tracker mortgage. This typically lasts as long as your mortgage – for example, 25 years. 

Just be aware that you can’t predict or plan your mortgage repayments on a tracker mortgage. A long-term tracker could be risky as you never know how much your repayments will be from one month to the next. Lifetime trackers also tend to have higher interest rates than shorter deals. 

What is a collar rate?

Some lenders put a collar or ‘floor’ rate on their tracker mortgages. It’s a limit to how low your mortgage interest rate can go. In other words, your rate will never drop below that limit, even if the Bank of England base rate does. 

Let’s say your tracker mortgage comes with a collar rate set at 2%. Even if the base rate dropped to a really low level, the minimum amount of interest you’d ever be charged would be 2%. 

What happens when my tracker mortgage deal ends? 

Once the introductory period is up, your lender will typically put you on their standard variable rate. SVR mortgages usually have much higher interest rates, so it’s a good idea to shop around and remortgage onto a better rate when your tracker deal ends.

What’s the difference between a tracker mortgage and a standard variable mortgage? 

Although standard variable rate mortgages also tend to follow the Bank of England base rate, every lender sets their own rate. This means they can change it whenever they want. 

The default standard variable rates of lenders also tend to be higher – typically a few percentage points above the Bank of England base rate. 

Tracker mortgage or fixed-rate mortgage? 

With a fixed rate mortgage,the interest rate is fixed for a set period – typically two, three or five years. No matter what happens to the Bank of England base rate, your interest rate will stay the same for the duration of the fix. A fixed-rate mortgage can be good for budgeting as you know exactly how much you’ll be paying each month.   
 
With a tracker mortgage, if the base rate changes, then your monthly payments will change too. 
 
Typically, both types of mortgage tie you in for an agreed period and if you want to switch mortgages sooner, you’ll have to pay an early repayment charge (ERC). Before you take out any mortgage you should understand how long it is before you can remortgage without any kind of financial penalty.   
 
If knowing what you’ll be paying is important to you, you could be better off with a fixed rate mortgage. If you think rates are going to stay low and you can find a better tracker deal, you might think it’s worth the risk of an increase if rates go up. But you’ll need to be able to afford increased payments if that happens.  

What are the pros and cons of a tracker mortgage?

Pros:

  • If the base rate drops, so will your repayments. 
  • Some tracker mortgages don’t have an early repayment fee – if interest rates rise, you could switch to a cheaper mortgage deal without paying a penalty. 
  • Tracker mortgages can be good value when the base rate is low. 

Cons:

  • Monthly repayments can go up if the base rate rises. 
  • If your tracker mortgage has a collar, you won’t benefit if the base rate plummets to an all-time low. 
  • Some tracker mortgages might charge a fee if you want to remortgage or pay off your mortgage early. 
  • If your repayments go up and you can’t afford to pay them, you risk losing your home. 

Should I get a tracker mortgage? 

Whether a tracker mortgage is suitable depends on what matters to you most with your mortgage. Some people prefer the certainty of knowing what their mortgage will cost them, while for others getting the lowest rate available might matter more. Some people are risk averse and don’t want to face the chance of their monthly mortgage payment rising, while others are happy to take the gamble. 
 
It’s a good idea, when considering a tracker mortgage, to look at whether you can afford the repayments if the base rate goes up rapidly. 
 
Tracker rates tend to be cheaper when the rate they are matching is low. The Bank of England base rate has been low since the financial crash. However, it’s possible that inflation will increase as the pandemic unwinds and companies increase prices to try to make up for lost profits, causing the Bank of England to start increasing the base rate. However, there have also been indications from the Bank of England that the rates could still go lower. 

Comparing mortgages

If you think a tracker mortgage might be right for you, make sure you check the terms and conditions carefully before you go ahead and apply. Look out for any costs and fees and whether there’s a collar rate attached. You’ll also want to be sure you can afford the repayments if interest rates rise. 

If you’d prefer to go with the certainty of a fixed-rate mortgage, you can compare through us. 

We’ve partnered with London & Country Mortgages Ltd (L&C)** who can offer fee-free, expert advice to help you find the right mortgage to suit your needs.  

Go to L&C mortgages

About London & Country Mortgages Ltd (L&C) 

**London & Country Mortgages Ltd (L&C) are a multi-award winning mortgage broker with over 20 years’ experience in helping people secure their perfect mortgage. Advice is provided by L&C, who are authorised and regulated by the Financial Conduct Authority (143002). 

L&C are not part of Compare the Market Limited. Compare the Market receives a % of the commission that our partner London & Country earns. All applications are subject to lending and eligibility criteria. 

L&C will not charge you a broker fee should you decide to proceed with a mortgage. 
 

Frequently asked questions

Can you make overpayments on a tracker mortgage?

When deciding on a mortgage deal, check how much you can overpay on your mortgage without paying a penalty. Many providers will let you overpay by around 10% a year. 

Can first-time buyers get tracker mortgages?

Yes, if you fit the lender’s eligibility criteria. But as a first time buyer your budget is likely to be tight, so you should carefully consider whether you could afford to pay your mortgage if rates went up – and your tracker mortgage along with them. Talk it over with a mortgage advisor if you’re not sure.

Can I get a joint tracker mortgage?

You can take out a tracker mortgage with someone else, like your husband, wife or partner. You’ll both be responsible for the joint mortgage. This means you’ll both be liable for any missed repayments or making up the balance if one of you is unable to pay. 

Can I move my tracker mortgage if I move?

Some lenders may allow you to ‘port’ your existing tracker mortgage to a new home instead of arranging a new mortgage. You should weigh up carefully whether porting your mortgage is a good idea by comparing the alternatives. You might be able to move to a different lender offering a more competitive deal. But if your current tracker mortgage has a competitive interest rate, then porting your mortgage can be a great option.  

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