What is a tracker mortgage?

August, 2022

A tracker mortgage is a type of variable-rate mortgage. Its interest rate ‘tracks’ (i.e. moves in relation to) an external interest rate, e.g. the Bank of England Base Rate or the London Inter-Bank Offered Rate (LIBOR). This makes it unlike an Standard Variable Rate (SVR) mortgage, which has a rate set solely by your lender.

A tracker mortgage therefore differs from a fixed rate mortgage, where you pay the same every month for the duration of the mortgage deal. 

However, a tracker mortgage is usually cheaper than an SVR mortgage, and more predictable, since the SVR interest rates can change at the whim of the lender.

Like fixed-rate deals, most tracker deals last for between two and four years, though it is possible to get a ‘lifetime tracker’ which lasts for the entire length of your mortgage. 

However, this is a risk because you cannot guarantee how much longer they will stay low.

How often will my monthly payments change?

Your mortgage repayments can in theory change each month, but this would be rare. 

It isn’t guaranteed that your rate will always drop if the reference base rate falls. That’s because some tracker mortgages have an interest rate collar (sometimes called a floor), which is a minimum rate it can reduce to.

Beware of tracker deals where the collar is set at the initial rate you pay, as this means you can never benefit if the base rate falls. Look for tracker deals that can fall as well as rise.

You might also be able to find deals with a cap on the maximum the interest rate could rise to. The cap is usually in place for a set period. These deals are rarer, but a mortgage broker can help you find one.

What are the benefits of a tracker mortgage?

  • When interest rates are low, a tracker can be cheaper than fixed rate deals
  • Your interest rate may also fall further (unless your collar doesn’t allow this)
  • Trackers often have shorter tie-in periods, making it easier to remortgage if you want to switch quickly.

What are the downsides of a tracker mortgage?

  • If base rates increase, your rate will too, so your monthly repayments will rise
  • If your deal has a collar which is set at your initial interest rate, you won’t benefit from base rate decreases.
  • If you can find a deal with a cap on maximum interest rates, the initial rate may be high.
  • As with all deals, you may have to pay early repayment charges (ERC) if you overpay, repay early or switch before your tie-in period ends.These fees can be steep, so check the terms of the mortgage carefully.

Who typically gets a tracker mortgage? 

If you’re a first-time buyer, a tracker mortgage could be a good option if rates are low, but it might be wise to find a deal with a cap if you’re not sure you could make higher payments should the rates increase.

Buy-to-let mortgages are typically more expensive, so choosing a tracker deal could help you take advantage of low interest rates to keep your payments down.

For more information on what type of mortgage is best for you, speak to an independent mortgage advisor for professional help and advice.

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