Our Guide to a Tracker Mortgage

The Mortgage Bank Mortgage Tracker Guide
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A tracker mortgage won’t mirror the base rate; instead, the tracker rate is set at a fixed margin above it. For example, if the Bank of England’s base interest rate is set at 0.5%, a lender’s 1% tracker deal would result in an interest rate 1% higher than the base rate- in this case, 1.5%. If the base rate were to go up to 1%, the tracker rate would be 2%.

A tracker mortgage is a kind of mortgage with a variable interest rate, which is based on another interest rate- most commonly the Bank of England’s base rate.

A tracker mortgage is most commonly offered as an introductory deal lasting from two to five years. However, some providers also offer ‘lifetime’ trackers, which run for the duration of the mortgage.

Read on for full details and the pros and cons of a tracker mortgage

After an introductory deal has ended, your mortgage would automatically defer to the lender’s standard variable rate (SVR). The SVR is not based on the Bank of England’s base rate.

Instead, it is decided on by the lender, who can change it whenever they like. A lender’s standard variable rate is almost certainly higher than any of their tracker rates.

Tracker Mortgage: How Does It Work?

Tracker mortgages are a form of a repayment mortgage, meaning that every repayment you make goes in part towards paying off the capital you borrowed, and partly towards paying off the interest on that capital.

When the interest rate rises, your monthly repayment will also rise- because each payment includes some interest. Similarly, if interest rates fall, your monthly repayment should decrease to reflect this.

However, around one in ten tracker mortgages feature a limit to how low your mortgage payments can fall. This is known as a ‘collar’ and usually specifies that your interest rate should never drop below the rate in place on the day you took out the mortgage.

The vast majority of tracker mortgages in the UK track the Bank of England’s base interest rate. The base rate is set by a group of experts who form the Monetary Policy Committee (MPC). The committee meets eight times per year and may adjust the base rate at their meetings in response to the general economic climate.

Even though the MPC meets eight times a year, it is extremely rare for them to change the interest rate this often; although in theory, it could, which is worth considering when trying to budget for a tracker mortgage.

One stand-out benefit of tracker mortgages is that they often don’t have any penalty charges for early repayment. This could help you save money if you are planning to remortgage, move house, or expect a change in circumstances that will allow you to pay off your debts early.

Tracker Mortgage: Who Is It For?

As with all variable-rate mortgages, tracker mortgages are best suited to people who have room in their budget for an increase in mortgage payments, and who tolerate risk well.

Even a relatively small change in the interest rate can have quite a significant impact on your monthly payments. This is especially true at the beginning of your mortgage when most of your monthly payment goes towards paying off interest.

As a result, it can be hard to budget, and it’s possible to end up in financial trouble on a variable rate mortgage if you don’t have much disposable income.

Tracker Mortgage: How Much Does It Cost?

The cost of a tracker mortgage over time will depend on the interest rates set by the Bank of England.

When interest rates are low, tracker mortgages offer some of the best rates on the market. However, the longer your tracker deal, the more likely it becomes that rates will rise again.

Some lenders may include a cap on your tracker rate, meaning the interest rate you are charged can never go above a certain level. While this can help you budget and offer peace of mind- especially on longer deals or lifetime trackers- it often entails having to pay a higher margin.

Similarly, some lenders may place a ‘collar’ on your tracker rate. This is a minimum rate and is usually set at the interest rate on the day you signed up.

If your mortgage has this kind of cap, your monthly payments can only ever stay the same or increase- and you will not be able to take advantage of a fall in interest rates.

Tracker Mortgage: How Long Does It Last?

Most tracer mortgages last are introductory offers which last between two to five years. After this introductory period, your mortgage is automatically moved to your lender’s standard variable interest rate (SVR).

The SVR is almost certainly higher than the lender’s tracker deals and does not follow the Bank of England’s base rate. Instead, it is set by the lender, who can change it whenever they like. For this reason, you may decide to remortgage for a better deal at the end of the introductory period.

Some lenders offer lifetime tracker mortgages. This locks in the benefits of a tracker for the duration of the mortgage term. Because you will never move onto the SVR, most lenders will ask for a slightly higher margin on lifetime tracker mortgages, which means that your monthly payments will be slightly higher than with an introductory offer. If you are considering a lifetime tracker mortgage, it could be a good idea to look for deals with a cap.

This is because the longer you stay on a tracker mortgage, the more likely you are to experience a rise in interest rates at some point.

Pros and Cons of Tracker Mortgages

ProsCons
Low-Interest rates can make repayments very cheapVariable payments can make it hard to budget
Many deals have no early repayment charge which is great when it comes to moving house or shopping for a remortgageWhen Interest rates rise, your monthly payments could increase suddenly
Deals with a cap are guaranteed to always stay below a certain interest rate, so you will know the maximum you’ll ever have to payIf your deal has a collar, you can’t take advantage of very low interest rates
Unless your deal is a cap, there is no limit to how much interest you could pay.

How Can The Mortgage Bank Help?

Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.

They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting The Mortgage Bank.
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