What is a tracker mortgage?
A tracker mortgage is a specific kind of variable mortgage. This means the interest rates you pay can change throughout your repayment. A tracker mortgage is one that follows an external interest rate, normally the base rate set by the Bank of England. The interest you pay on your mortgage will increase or decrease depending on how it’s set externally.
If you decide on a tracker mortgage, your lender will usually set a percentage to track above the base rate. For example, if your lender sets a percentage of 2%, this means your mortgage will track 2% above the Bank of England base rate. Currently, the base rate is set at 0.75%, so if your lender sets a percentage of 2%, you would pay 2.75% interest per month until the base rate changes.
It’s worth remembering that a longer-term tracker mortgage will usually have a higher percentage set by the lender. Comparing mortgages can help you find the best available tracker mortgages. You can use our mortgage comparison tool to find the best deal.
How do tracker mortgages work?
Tracker mortgages usually follow the Bank of England base rates. The Bank of England decides whether to change the base rate on the first Thursday of each month; however, it is rarely changed, meaning your repayments are likely to be stable.
Remember that the base rate can change. It tends to increase when the economy is doing well and decrease during recessions. This means that you should consider that your tracker mortgage interest is likely to rise as the economy recovers.
If you are considering a tracker mortgage you should be aware that the external rate can increase as well as fall. This means you must be sure you can afford repayments even if it rises.
Your lender may also apply an interest rate collar to your mortgage, which limits how low your rates can go. This will prevent your rates from falling below a certain level, even if the base rate decreases. Not all lenders will apply a collar, so it is essential to check whether your lender offers one if you are considering a tracker mortgage to keep your repayments as low as possible.
Occasionally, tracker mortgages may have a cap. Even if base rates rise above that cap, you will never pay more. Capped tracker mortgages are rare but worth looking out for if you want to keep your repayments low. These tracker mortgages will also often have higher initial rates because you are paying for the security of a cap, so they may not offer the lowest rates initially.
You should also consider that tracker mortgages typically last for a set number of years, after which you will be moved to the lender’s standard variable rate. This is often higher, so you may want to look for a 'switch and fix' feature, which will allow you to change to a fixed mortgage deal if rates get too high.
Should I get a tracker mortgage?
Some of the advantages of tracker mortgages include:
The introductory rates are usually lower than other mortgage deals and among the lowest interest rates available.
Your interest will be cheaper when the Bank of England base rate is low, and it has been below 1% for over a decade.
It can be easier to make overpayments, helping you repay your mortgage faster and pay less interest.
However, you will need to be aware of the disadvantages before choosing a tracker mortgage. These include:
Your mortgage repayments will increase if the base rate does. The base rate can change on a monthly basis, so you will not know in advance how much you will pay each month.
If your tracker mortgage has a collar you will not be able to take advantage of the lowest rates.
You may need to pay an early repayment charge to exit your deal.
Consider all the advantages and disadvantages of tracker mortgages before comparing deals and deciding which one works for you.