What is a tracker mortgage?
A tracker mortgage will usually follow the Bank of England base rate to then set the interest rate you pay on your mortgage.
Your mortgage is likely to be your biggest financial commitment, so shopping around for the best deal is vital. We can help by comparing thousands of products from a wide variety of lenders, covering the whole of the market. This way, you can be confident you’re getting the right deal.
A tracker mortgage is a type of variable loan that, like any other mortgage, you use to buy a new home or get on the property ladder.
Tracker mortgages usually follow the Bank of England’s base rate, which is the interest rate at which high-street banks borrow money. The Bank of England decides whether to change its base rate on the first Thursday of each month.
When the external interest rate goes up or down, the interest you pay on your tracker mortgage deal will change as well.
If you have a tracker mortgage, the amount of interest you pay on your mortgage might be the base rate, plus or minus a certain percentage.
Let’s say, for example, that the interest you pay on your monthly mortgage repayments is set as the base rate plus 1.5%. If the base rate at the time is 0.5%, the amount of interest you need to pay on your monthly repayment will be 2%. Because these mortgage rates track the base rate, this means the rate you pay can change, just like a standard variable-rate mortgage
So if the base rate in the example increased to 1%, the rate you pay would go up to 2.5%. Equally, if the base rate fell, so would the rate you pay. If you are considering a tracker mortgage, it’s important to make sure you can still afford your repayments if the external rate were to increase.
Data collected by L&C, accurate as of March 2020
If you have a variable mortgage, your lender is free to set their own interest rates. They can also change the interest rates they charge at any time. There are several factors that may influence the lender to alter their interest rate, including the cost of borrowing.
What makes tracker mortgages different is that they are tied to an external rate, which your lender must follow. This means that tracker mortgages are often cheaper than variable-rate mortgages.
While with tracker and variable-rate mortgages your repayments could go up or down, fixed-rate mortgages come with set instalments that won’t change over the course of your mortgage term. This is regardless of what happens to the Bank of England base rate, as your interest rate will remain unvaried. Therefore, a fixed-rate mortgage could represent a good solution if you want to budget, as you know exactly how much your repayment fees are each month.
You can find tracker mortgage rates that last for two, three, five, or ten years. When the deal comes to an end, you’ll usually be moved to the lender’s standard variable rate (SVR), which is often higher.
This is a good time to then look to remortgage to another tracker or a fixed-rate deal, either with the same lender or a new one. You can also get lifetime tracker mortgages, which track the base rate for the whole mortgage term and won’t revert to the lender’s SVR.
Tracker mortgage deals are usually agreed on for a set period. Because of this, if you want to switch to another deal or pay off your mortgage early, you will probably have to pay an early repayment charge (ERC).
If fees apply, it’s up to you to decide whether you’re happy to pay an ERC to change mortgage deals. Alternatively, to avoid spending extra money, you can wait for your mortgage term to end.
Some lenders might apply an interest-rate collar, which is also known as an interest-rate floor, to your tracker mortgage. This means that your interest rates won’t fall below a certain level, even if the base rate does.
If your lender sets a collar at 2% and the external interest rate goes down to 1.5%, you will still pay 2% interest on your mortgage. Not all tracker mortgages have collars, but you should make sure you know what you’re getting before you choose a mortgage deal.
Some advantages of tracker mortgages include:
Introductory tracker mortgage rates can be lower than other mortgage deals
Tracker mortgages are cheaper when the external rate is low. The Bank of England base rate has been below 1% for over ten years
It might be easier to overpay on your mortgage, meaning your mortgage is paid off more quickly and with less overall interest
If the external rate falls, so will your interest payments. But if the external rate goes up, some providers will let you switch to a fixed-rate mortgage without any fees
Some disadvantages of tracker mortgages can include:
If the base rate increases, your mortgage repayments will also increase. So if you prefer to know in advance how much you’ll be paying each month, a tracker mortgage won’t be for you
A collar rate can mean that you won’t be able to take advantage of low rates if the base rate dips below a certain point
You may have to pay an early repayment charge if you need to get out of your deal early
Finding a better deal for your mortgage is simpler when you compare mortgages online at MoneySuperMarket.
You just need to give a little information about your borrowing requirements, such as how much you need and over how long, as well as the price of your property. You’ll then be able to compare various quotes from different providers by their initial monthly cost and interest rate, the overall cost of the mortgage, and whether there are any fees included as part of the deal.
The comparison tool won’t take into account your financial situation or your credit history, so the interest rate deal you’re offered on your tracker mortgage may be different to the quotes you see.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Tracker mortgages usually follow the Bank of England’s base rate which, again, is the interest rate at which high-street banks borrow money. The Bank of England decides whether to change its base rate on the first Thursday of each month.
The base rate tends to increase if the economy is doing well, whereas it will likely fall during a recession. This means that with a tracker deal, you will pay less for your mortgage during tough times. However, your interest rates may rise when the economy recovers.
Yes, if you’re a first-time buyer, there is nothing stopping you from getting a tracker mortgage. Generally, most lenders will allow you to take out this type of mortgage as long as you meet their eligibility criteria.
However, it may be worth considering whether you will be comfortable repaying a tracker mortgage’s instalments. As mentioned, with a tracker mortgage, repayments will become more expensive if rates go up. So, make sure to take into account every aspect when choosing the right mortgage deal for your needs.
Yes, you can. Based on your personal circumstances, joint tracker mortgages could be a valid solution if you plan to take out a mortgage with someone else, such as your partner or close friend.
Bear in mind that when you opt for a joint mortgage, both parties are responsible for the loan. In the event of any missed repayments, you will be liable to make up the balance if the other person can’t keep up with the instalments.