What is a tracker mortgage?
A tracker mortgage is a type of variable rate mortgage and works by going up and down in line with a base rate, which is typically the Bank of England base rate. This rate is set by the Monetary Policy Committee on a monthly basis and governs the rate at which high street banks can borrow money. Quite simply, the monthly repayment on a tracker mortgage will move directly in sync with changes to this underlying rate.
In common with fixed-rate deals, most tracker mortgages tend to offer a 2 to 5 year deal, after which time it reverts to the lender's standard variable rate (SVR). It is, therefore, advisable to keep a note of when your deal is coming to an end and take action to move on to an alternative, more competitive option, whether this is another tracker or a fixed-rate mortgage deal.
In terms of the rate, the lender will clearly set out the interest that is payable over and above the base rate. For example, the deal could be the bank base rate plus 2%. This means that with the Bank of England rate at 4.00%, the total rate would be 6.00%. If, however, the bank base rate went up to 4.50%, the overall rate would be 6.50%.
Are there limits on how high or low a tracker mortgage rate can go?
In theory, the way that tracker mortgages work means that a borrower could benefit if the base rate falls to a negative rate. However, most lenders have a "collar" or "floor" included in the terms and conditions for the tracker deal, meaning the rate won't fall below a certain level. Moreover, it looks increasingly unlikely that rates are likely to fall in the foreseeable future, with the economic outlook suggesting a rate rise is more likely.
In some cases, lenders will include a "cap" on the maximum amount of interest payable, a move designed to give borrowers added peace of mind. This feature generally comes at the price of a higher overall initial rate and is only really valuable in a steadily or rapidly rising market.
Another factor to consider is whether the specific tracker deal you are considering has an early repayment charge (ERC) attached to it during the initial period. If not, the risk of dramatic changes to the underlying base rate is balanced by the option to change to another deal without facing being financially penalised for doing so.
What are the different types of tracker mortgages?
While the vast majority of deals will be based on the Bank of England base rate, there are some tracker mortgages that follow Libor, which stands for London Inter-Bank Offered Rate. This is the rate at which lenders loan money to one another and is typically much more changeable and significantly higher than the Bank of England base rate. It tends to only be used for certain sub-prime deals, as well as some buy-to-let products.
Another option is a lifetime tracker which, as the name suggests, tracks at the same level for the life of the mortgage. Generally, lifetime trackers don't offer the most attractive rates but avoid borrowers being moved over to an uncompetitive standard variable rate, as happens with shorter-term tracker deals. It is rare to find a tracker deal in the current mortgage market that has no early repayment charges (ERC) attached to the terms and conditions but some tracker mortgage deals do come with shorter periods during which an ERC may be applied. It is also worth comparing ERCs as some mortgage deals charge smaller levels of ERCs than others which could make switching mortgage deals more financially viable if a different deal were to come up.
Advantages of a tracker mortgage
- The introductory rate on a tracker mortgage can often be lower than other types of mortgages
- They may have smaller early repayment charges than similar fixed-rate deals
Disadvantages of a tracker mortgage
- Tracker mortgages offer less certainty than a fixed-rate deal making it more difficult to plan your monthly spending
- If rates rise sharply, it could make it difficult to afford the monthly repayment
- If your deal has a "collar", you won't be able to benefit if rates fall below a certain level
Is a tracker mortgage right for you?
A tracker could be a good option if the rate offered is competitive and suits your needs for flexibility. The key, however, is properly assessing what impact on affordability an unexpected rise in the base rate could have on your finances in the future. It is also vital to properly scrutinise the terms and conditions for the individual products, finding out if it has an early repayment charge during the introductory period; if there is a floor on the level the interest rate can fall to and double checking it is tracking the Bank of England base rate. You can check current tracker mortgage deals as well as alternative options based on your specific mortgage needs using our mortgage rate comparison tool.
How to compare the best tracker mortgages
If you decide to opt for a tracker mortgage, working with an independent, whole-of-market mortgage broker will ensure you have access to a wide range of lenders and deals, some of which may not be available to the general public. When choosing a mortgage broker, it is a good idea to check whether you need to pay for their services and, if not, how they are remunerated. We have teamed up with online mortgage broker Habito*, which provides a highly competitive service to help you find the most suitable mortgage deal from over 90 lenders. For more details on what Habito offers, read our review - Habito Review: The best online mortgage broker for you?
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