Tracker mortgages come with lots of pros and cons you’ll need to consider against a fixed rate mortgage.
This guide explains what tracker mortgages are, how they work, and how they compare with fixed rate deals.
What is a tracker mortgage?
Put simply, a tracker mortgage is a type of variable rate mortgage which ‘tracks’ the Bank of England’s base interest rate.
Because it’s a variable rate mortgage, the interest rate you pay can change, meaning your monthly repayments can go up or down.
Tracker mortgages are usually offered at a certain percentage above the Bank’s base rate for a set period of time.
Other types of variable rate mortgage include:
- Standard Variable Rate (SVR) mortgages
- Discounted rate mortgages
Each lender sets their own Standard Variable Rate (SVR) and this is generally the rate you move on to when your fixed, discounted, or tracker rate expires.
Discounted rate mortgages, meanwhile, offer a rate that is discounted from a lender’s SVR.
Because a lender’s SVR can change at any time, this means your discounted rate can go up or down, too.
How much will I pay each month with a tracker mortgage?
Let’s say you take out a tracker mortgage at +1.5%.
This means you’ll pay an interest rate that’s 1.5% higher than the Bank’s base rate for the duration of your deal.
So, if the base rate is 3% when you start the deal, your initial interest rate will therefore be 4.5%.
However, if the base rate rises by 0.25% to 3.25%, your mortgage interest rate will go up by the same amount, from 4.5% to 4.75%.
Alternatively, if the base rate were to fall by 0.25% to 2.75%, your interest rate would also fall by 0.25% to 4.25%.
How long do tracker mortgages last?
Most tracker mortgages last for between two and five years.
However, some trackers are available on a one-year basis, while there are also lifetime trackers with no fixed end date.
The longer the term of a tracker, the higher the introductory interest rate is likely to be.
Cheaper introductory tracker rates are also generally available for buyers with lower loan-to-values, as there is less risk for the lender.
What are tracker collars, caps, and early repayment charges?
Some tracker mortgages come with what are known as ‘collars’ and ‘caps’.
A collar is the minimum interest rate your tracker can fall to when the Bank of England base rate falls.
For example, if you have a +1% tracker with a collar of 2%, you’ll never pay less than 2% as an interest rate.
So, even if the base rate falls to 0.75%, you’d still pay 2% in interest rather than 1.75% if the collar wasn’t in place.
A ‘cap’, meanwhile, is a maximum amount of you’ll pay even if the Bank’s base rate rises substantially – essentially, the opposite of a collar.
Tracker mortgages will collars generally come with lower introductory interest rates, while those with caps tend to have higher introductory rates.
A tracker with a collar set at its introductory rate would mean you’d never benefit from any falls in the Bank base rate and always pay at least that introductory level of interest.
What should I do when a tracker mortgage expires?
When a tracker expires, your lender will usually move you on to their Standard Variable Rate (SVR).
This could mean your repayments go up, so you may wish to consider remortgaging with your current lender or a new one in order to secure a cheaper rate.
How do tracker mortgages compare to fixed rate?
Trackers and fixed rates are two of the most popular mortgages taken out by buyers – with around 75% of UK homes mortgaged on fixed rate products.
Fixed rates are more widely available, too, with more than 1,400 deals available the time of writing, compared with 236 variable rate products (including trackers).
Fixed rates and trackers are very different and come with several pros and cons:
1. Interest rates
While a fixed rate mortgage means your interest rate stays the same for the duration of the deal, a tracker interest rate can go up or down depending on the Bank of England’s base rate.
2. Introductory rates
Tracker mortgages are generally cheaper to begin with than fixed rates.
This is because fixed rates offer security against a rising base rate, whereas trackers can see monthly repayments rise.
3. Early repayment charges (ERCs)
Many trackers come with smaller or no early repayment charges (ERCs), whereas fixed rate deals often have expensive ERCs.
Having no ERCs gives you more flexibility to move or switch mortgages when in the middle of a deal.
Should I choose a tracker mortgage?
Whether or not a tracker works for you will depend on your individual circumstances.
While trackers can offer more flexibility and lower initial interest rates, they are riskier as Bank of England base rate rises could see your monthly repayments increase.
Always seek financial advice before making a decision with your mortgage.
