Tracker mortgages

What is a tracker mortgage?

By Peter Carr Wednesday 24 January 2018
 

Read our guide to find out whether a tracker mortgage is the right option for you and your home.

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How do tracker mortgages work?

A tracker mortgage is a type of variable rate mortgage. With variable rate deals, the rate of interest charged can move up and down, distinguishing them from fixed rate offers, where the rate charged remains the same for a specified term.

With a standard variable rate mortgage, the rate changes at the discretion of the lender. With a tracker, the rate follows the Bank of England base rate.

The tracker’s actual rate stands at a stated amount above the base rate, such as 1.75% or 2%. So a tracker’s rate will be advertised as ‘base rate plus 1.75%’ or ‘base rate plus 2%’, for example.

Say the base rate is 0.5% and the mortgage in question is ‘base rate plus 2%’. The actual rate charged will be 2.5%.

When the base rate changes, your rate will go up or down accordingly, so, if it rises to 1%, then you’ll pay 3%, whereas if it falls to 0.25%, you’ll pay 2.25%.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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MoneySuperMarket/London & Country data, correct as of December 2017

How long do tracker deals last?

Tracker mortgages are usually available for two, three, five or 10 years. Once this period comes to an end, the lender will move you onto its standard variable rate, which is usually more expensive.

However, you have the option to remortgage to another tracker or a fixed rate deal, either with the same lender or a different firm. In fact, 73% of homeowners choose tracker mortgages when remortgaging rather than purchasing a property, according to MoneySuperMarket data. 

It is also possible to opt for a ‘lifetime’ tracker, which tracks the base rate throughout the entire term of the mortgage.

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MoneySuperMarket/London & Country data, correct as of December 2017

 

Trackers usually have early repayment charges, which you will have to pay if you want to get out of your deal early. Make sure you’re aware of these potential costs when you opt for any particular deal.

Pros and cons of tracker mortgages

The advantage of a tracker mortgage is that, during a period when interest rates are low and falling, you could end up paying less each month.

If you’d locked into a fixed rate deal, where your repayments don’t change regardless of what happens to interest rates, you wouldn’t see any benefit from a base rate fall.

But on the flipside, when interest rates go up, so will your mortgage rate, so you could end up paying more than if you’d gone for a fixed rate mortgage.

When are tracker mortgages a good idea?

Trackers do what it says on the tin - they faithfully track the base rate, whether it heads up or down.

Logically, if rates are high in historical terms and there is widespread expectation among experts that they will fall rather than rise further, a tracker might be a good option.

But if rates are historically low and there is little or no likelihood of their falling further, a tracker might not be such a good idea, as the only direction they can head is upwards.

Know your LTV

When comparing mortgages, understanding the loan to value (LTV) ratio of your mortgage is important. The LTV ratio simply explains how much of the property’s value you have borrowed and how much you’ve put down for a deposit. For example, if a property is worth £200,000 and you borrow £180,000, that means you’ll have put down at £20,000 (10%) deposit and your LTV is 90%.

A higher LTV generally means fewer deals are available and interest rates will be higher. Furthermore, the best rates are often reserved for homeowners that only need to borrow up to 60% of their property’s value, which would typically happen when they are remortgaging.

According to MoneySuperMarket data, the average LTV for homeowners with tracker mortgages is 66%.

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MoneySuperMarket/London & Country data, correct as of December 2017

What are the alternatives to tracker mortgages?

There are several types of mortgage from which to choose, so if a tracker isn’t right for you, there are other options to consider.

For example, if you want peace of mind that your monthly repayments won’t change over time, a fixed rate mortgage is likely to be your best option. You can typically fix in for two, three or five years, but a few lenders also offer 10-year fixes.

Alternatively, if you don’t mind a variable rate mortgage, but want to be certain that costs won’t exceed a certain level, then you might want to think about a capped mortgage, where rates can move up and down, but there is a cap above which the rate can’t go.

Discounted mortgages are another alternative to tracker mortgages. These are also variable rate mortgages, but offer a discount off a certain interest rate, usually the lender's standard variable rate.

The discount is typically for two to five years, although it can last for the whole term of the mortgage. There will generally be an early repayment charge if you pay off the mortgage during the discounted period.

How to save money on your car insurance illustration

MoneySuperMarket/London & Country data, correct as of December 2017

Base rate calculator

You can work out how your mortgage will be affected by base rate changes by using our handy base rate calculator. Click here to try it out.

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