Mortgage repayments always involve interest on top of the amount borrowed. This means that choosing a mortgage with the right type of interest is really important and can help you save money. You can choose a fixed rate mortgage if you need to be certain of what you will repay in advance. If you can afford to be more flexible with your repayments, variable mortgages can often save you money in the long run. This guide takes you through tracker mortgages, how they work, the advantages and disadvantages to help you decide whether a tracker mortgage could save you money.
In This Guide:
What is a tracker mortgage?
A tracker mortgage is a specific type 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 that 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 get the available for tracker mortgages, you can try using 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.
Don’t forget 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 increase 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. This will prevent your rates from falling below a certain level, even if the base rate does. Not all lenders will apply a collar so is essential if you are considering a tracker mortgage to keep your repayments as low as possible.
Occasionally, a tracker mortgages may have a cap, even if base rates rise above that cap you will never pay more. Capped tracker mortgages are very unusual, but are worth looking out for if you are hoping to keep your repayments low. These tracker mortgages will also often have higher initial rates as you are paying for the security of a cap so they may not offer the .
You should also consider that tracker mortgages usually only last a set number of years, after which you will usually 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 often lower than other mortgage deals, often among the lowest mortgage 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, meaning you will repay your mortgage more quickly and therefore 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 get out of your deal early.
You should consider all of the advantages and disadvantages of tracker mortgages before comparing deals and deciding which works for you.