If you’re not keen on the idea of having a fixed rate for your mortgage, a tracker mortgage is a popular choice of variable rate mortgage. It works slightly differently from the other types, offering flexibility and slightly more predictability when it comes to the interest rate. So what exactly is a tracker mortgage, how does it work and is it right for you?
What is a tracker mortgage?
A tracker mortgage is a variable rate mortgage, which means that the interest rate you pay can go up or down. It tracks an external rate, which is usually the Bank of England base rate. This is different from a standard variable rate (SVR) where the rate is set by the lender.
How does a tracker mortgage work?
To determine the interest rate you pay, a set percentage is added to the base rate. The Bank of England base rate is reviewed eight times per year so your mortgage interest rate has the potential to change each time. If the base rate increases, your interest rate will increase and so will your monthly mortgage payments. If the base rate is lowered, however, your interest rate will be lowered accordingly and you’ll benefit from cheaper payments.
For example, the lender may add 1% to the base rate for their tracker rate. This means that whatever the base rate is, your interest rate will always be 1% higher. If the base rate is 4.5%, your interest rate will be 5.5%. If the base rate increases by 0.25%, your rate will go up to 5.75%. Should the base rate be lowered by 0.25%, however, your rate will come down to 5.25%.
What is a collar rate?
Some lenders set an interest rate collar (or floor) for their tracker mortgage deals. This is a rate below which your interest rate cannot fall. Even if the base rate drops below the collar, your rate won’t go any lower. This means that your monthly payments won’t decrease any further. This offers lenders protection in times when interest rates are low.
Some lenders also offer an interest rate cap (or ceiling) although this type of deal is not very common. A capped rate is the maximum that your rate can increase to, even if the base rate goes higher than this. This offers you some protection against rising rates. It gives you peace of mind that your monthly payments will never exceed the cap that has been set.
How long does a tracker mortgage last?
You can choose how long your tracker mortgage lasts, whether you prefer a short or long term. Typically, terms ranging from 2 to 5 years are chosen for tracker mortgage deals although longer deals, such as 7 or 10 years can be arranged.
When your deal ends, the rate will revert to the lender’s standard variable rate unless you’ve arranged a new deal to switch to. The lender’s SVR is usually higher than other rates. Therefore, it’s best to start looking for a new deal within the last 6 months of your tracker deal.
Instead of a set term, you can arrange a tracker mortgage for your entire mortgage term. This is called a lifetime tracker mortgage. With this arrangement, you don’t need to worry about searching for a new deal to switch to when an introductory period has ended. This saves you from having to pay the costs for a new deal or reverting to your lender’s SVR if you don’t find a new deal.
This can be cost-effective over the lifetime of your mortgage. However, you usually have to pay a higher rate than if taking a shorter term. You’ll also have unpredictability with rate fluctuations until you have repaid your mortgage.
What are the benefits of a tracker mortgage?
There are various benefits to having a tracker mortgage:
- Introductory deals often have lower rates than other deals.
- When the base rate (or other external rate being tracked) drops, so does your interest rate. This makes your monthly payments cheaper.
- When the rate is lower, you may be in a position to overpay on your mortgage. This makes it quicker to repay your mortgage and also reduces the amount of capital that interest is payable on.
- If the base rate increases, you know exactly how much your tracker rate will be.
- If the tracker deal has a cap, your interest rate won’t go above it.
- Some lenders allow you to switch to a new deal without penalising you with an early repayment charge.
Are there any drawbacks to having a tracker mortgage?
There are also some drawbacks to consider before taking out a tracker mortgage:
- A tracker mortgage has a variable rate, which means that your mortgage payments can fluctuate throughout the term.
- If a collar has been set by the lender, you won’t benefit from lower mortgage payments if the base rate (or another external rate) continues to decrease below it.
- If the base rate continues to increase, your mortgage payments will become more expensive.
- Capped-rate deals are very hard to find and usually have higher interest rates.
- An early repayment charge may be payable if you want to leave your deal early, which can be expensive.
Should you get a tracker mortgage?
Whether or not a tracker mortgage is right for you depends on your circumstances and preferences. If you’d rather have the stability of knowing exactly what you have to pay each month or need to stick to a budget, then a fixed rate mortgage is better for you. However, if you have a flexible budget and want to take advantage of lower rates without being too concerned that rates might increase in the future, a tracker mortgage may be ideal for you.
Whilst it’s not as financially predictable as a fixed rate mortgage, a tracker mortgage is slightly more predictable than other variable rate mortgages. It usually tracks the Bank of England base rate, which is reviewed eight times per year. If the base rate changes, your interest rate changes by the same amount, whether that’s higher or lower than your current one. Other variable rate mortgages are based on lenders’ standard variable rates, which can change at any time and without warning.
If you’re currently paying your lender’s standard variable rate (SVR), switching to a tracker mortgage can save you money. This is because SVRs are set at the discretion of lenders and tend to be higher than other rates.
Another difference between a tracker mortgage and one with a standard variable rate (SVR) is that it can be more flexible. Some lenders allow you to repay your mortgage early or switch to another deal without having to pay an early repayment charge.
Speak with an expert on tracker mortgages
Before making a decision, our mortgage brokers can discuss your circumstances, attitude towards risk and future plans. This can help ascertain whether a tracker mortgage is right for you or if you’re better suited to an alternative, such as a fixed-rate deal. To get started, just give us a call on 01322 907 000.
When you’re happy to proceed with a tracker mortgage, our brokers can search and compare the deals, including exclusive broker-only deals, to find the best ones suited to your needs. It’s important to understand that the lowest rate for a tracker mortgage is not necessarily the cheapest deal. Our mortgage brokers can compare the interest rates as well as the costs, such as the lenders’ arrangement fees, to find the best tracker deal for you.