What is a Tracker Mortgage?

A tracker mortgage is a type of variable rate mortgage where the interest rate tracks another rate. Usually this will be the Bank of England base rate, though the rate you pay typically has a margin added on top.

Ruth Jackson-Kirby, Tim Leonard Last updated on 14 January 2022.
What is a Tracker Mortgage?

A tracker mortgage is essentially a home loan where the interest rate automatically moves in line with another rate, most likely the Bank of England base rate. As a result, you could consider a tracker mortgage if you think that the base rate of interest might fall or that tracker mortgage rates are already low compared to other types of mortgage. However, as with all variable rate mortgages, interest rates on a tracker mortgage can rise as well as fall. This makes it essential to consider whether your finances could withstand an increase in your monthly mortgage repayments if this were to occur.

How does a tracker mortgage work?

Importantly, the interest rate you pay on a tracker mortgage is usually different to the value of the rate that is being followed. This is because tracker rates are generally priced a certain amount of percentage points above, or sometimes below, the rate it is linked to.

For example, if you have a tracker mortgage set at base rate plus 1.5% and the base rate is 0.5%, the interest rate your monthly repayments will be based on would be 2%. If the Bank of England then increased the base rate to 1%, your mortgage interest rate would then rise to 2.5%.

Use a tracker mortgage calculator

Given your tracker mortgage rate will fluctuate in line with changes to the base rate, it’s crucial to understand the impact any movement could have on your monthly repayments. So making use of a tracker mortgage calculator is key.

For instance, let’s imagine you have a £200,000 mortgage with a 25-year term and a rate set at 1.5% above base rate. If the base rate is 0.5%, the rate on your tracker mortgage will be 2%, which equates to a monthly repayment of £848. However, should the base rate then rise by 0.5% to 1%, your tracker rate would increase to 2.5% and, as a result, your monthly payments would rise by £49 to £897. This would cost you an extra £588 a year.

You can make similar calculations to see how much you could save if interest rates fall, but it’s the potential impact of rates rising that you need to be most aware of.

What tracker mortgage options are available?

Some tracker mortgages will track the Bank of England base rate for the whole term of the loan – these are known as lifetime trackers. However, they are often considered risky to borrowers because their sheer length makes it even harder to predict where interest rates might be by the time the mortgage ends. Generally, you can expect lifetime tracker mortgages to have the highest tracker interest rates as well.

Other tracker mortgages will only follow the base rate for a set period of time, perhaps for two, four or five years.

What happens at the end of a tracker mortgage?

Once an initial period ends, you will automatically move on to your lender’s standard variable rate (SVR), unless you have already arranged to remortgage to a new deal. While an SVR can also increase and decrease to give higher or lower monthly payments, the main difference is that a lender could change its SVR at any time, whereas the rate on a tracker mortgage should only change if the base rate moves.

As the SVR is generally higher than the final rate you will have paid on your tracker mortgage, remortgaging is usually considered a good idea.

» COMPARE: Remortgage deals

What are tracker mortgage collars and caps?

Some tracker mortgages come with a collar rate. This means your interest rate can’t fall below a set minimum and protects the lender in case the base rate falls very low or even into negative territory. So if the base rate falls below your collar rate, your interest rate and monthly repayments won’t follow it to the same level.

It may also be possible to get a tracker mortgage with a cap. This is the opposite of a collar and means your interest rate can’t rise beyond a certain level, no matter how high the base rate goes. A tracker mortgage with a collar tends to have slightly higher interest rates because it provides borrowers with a degree of protection against rising rates.

Right now a tracker mortgage is most likely to track the Bank of England base rate. This is because the other main rate that some tracker mortgages follow, the London Interbank Offered Rate, or Libor, is no longer being used as a benchmark for interest rates. If you have a Libor tracker mortgage, your lender should have switched it to track the base rate before the end of 2021.

Given the influence base rate movements have on tracker mortgage rates, it’s important to learn as much as you can about how the Bank of England sets rates. Base rate decisions are the responsibility of the Monetary Policy Committee, which meets roughly every six weeks. This means in theory, the base rate could change eight times a year. The Bank also has the option to call emergency meetings and change the interest rate at other times, depending on what is happening to the economy.

In reality, over the past decade, the base rate has changed relatively infrequently since being lowered to 0.5% in March 2009 amid the global financial crisis. Just six changes were made in the years that followed to the end of 2021. But while there hasn’t been regular movement of late, this shouldn’t be taken as an indication that more frequent rate changes won’t return.

Should I get a fixed or tracker mortgage?

Ultimately this will depend on your financial situation and your propensity towards taking risks.

Fixed-rate mortgages are often more expensive than tracker mortgages. That is because you are paying a premium for the certainty of knowing how much interest you will pay and that your monthly repayments will stay the same for the length of your deal. But while a tracker can initially be cheaper than a fixed rate, you are taking on the risk of what the underlying interest rate might do. If it is tracking the base rate and that rises during your mortgage deal, you could end up paying more than if you had opted to fix your rate.

It is also worth noting that fixed-rate mortgages usually come with early repayment charges (ERCs). This means you’ll pay a penalty if you repay the mortgage before your deal ends. In contrast, some tracker deals come without these charges, something which could save you a significant outlay if there is a chance of you moving home during your deal.

» MORE: Fixed versus variable rate mortgages

Tracker mortgage pros and cons

No mortgage decision should ever be taken lightly, but with a tracker mortgage, the potential for your monthly payments to change could work to your advantage or it may not.

Advantages of tracker mortgages

  • Low rates: Tracker mortgages often offer lower initial rates than fixed-rate mortgages.
  • Price: If the base rate is low, as it has been in recent years, tracker mortgage rates are often low.
  • Cost might change in your favour: If the base rate falls, your repayments, and the cost of your mortgage, will usually also fall.
  • Flexibility: You may be able to avoid early repayment charges if you opt for a tracker mortgage and want to move or pay off your loan.
  • Cap your rate: Opt for a tracker with a cap and there will be an upper limit to the rate you could pay.

Drawbacks of tracker mortgages

  • Uncertainty: Your monthly repayments will change if the interest rate moves.
  • Your costs might increase: You will usually have to pay more if interest rates rise, and there will be no maximum to what this might be if your mortgage doesn’t have a cap.
  • Rate collars: Opt for a tracker mortgage with a collar, and there may come a time when a drop in the base rate doesn’t result in a decrease in your payments.

How to find a mortgage suitable for you

Taking the time to evaluate all of the various mortgage options is essential to finding the right mortgage for you.

If you feel you need support in reaching a decision, approaching a mortgage broker is often a good idea. As well as helping you to narrow down your mortgage options, they may also have access to mortgage deals that individual borrowers can’t apply for directly.

If you believe a tracker mortgage is the best option for you, comparing the current interest rates is important but be sure to look at the fees and charges that come with the mortgage as well. Often the mortgages with the lowest rates come with the highest fees, so you need to think about the cost of the mortgage overall. Whether a particular deal has a collar or a cap, and comes with early repayment charges are important considerations too.

» COMPARE: Tracker mortgages

Image source: Getty Images

About the authors:

Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more

Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more

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