What is a tracker mortgage?

What is a tracker mortgage? Image credit: ID 8682595 © Terrance Emerson | Dreamstime.com

A tracker mortgage is a type of variable rate mortgage which "tracks" a base rate – usually the Bank of England’s base rate. If you get a tracker mortgage, your mortgage repayments (including the interest you pay on your mortgage) could change every month.

What’s the difference between a tracker mortgage and a variable mortgage?

If you have a variable mortgage, a mortgage lender can set their own variable rate. However, a tracker mortgage normally follows the Bank of England’s base rate – which they don’t control.

What’s the difference between a tracker mortgage and a fixed rate mortgage?

A fixed rate mortgage’s payments don’t change – at least for the short term. Fixed rate mortgages offer a good value rate for a limited time, so if you need to budget effectively and you want to know how much you’ll be paying every month, they’re ideal. Your payments also won’t go up throughout the mortgage’s lifespan, no matter how high rates go.

However, you won’t get reduced mortgage payments if interest payments drop – one of the benefits of tracker mortgages.

Tracker mortgages and interest rates

As a rule, tracker mortgage rates do not exactly match the interest rates they track, but they’re set at a level just above the set rate.

It’s a good idea to look around for introductory deals - for example, a tracker mortgage which offers the Bank of England’s Base Rate plus 1.00%. So, if the base rate is currently set at 0.75%, the rate you’d pay would be 1.75%.

How do tracker mortgages work?

Tracker mortgages "follow" the Bank of England’s base rate. If interest rates fall, you’ll make lower payments to your lender. If interest rates rise, your payments will increase.

If you get a tracker mortgage introductory offer, they can be very good value. However, as mentioned previously, the amount you pay back can go up as well as down.

One thing to bear in mind is that you may never be able to predict or plan your mortgage payments in advance - it’s important to make sure you could still afford your mortgage if your payments increase.

How long can I get a tracker mortgage for?

You can generally get a tracker mortgage for an introductory period, usually between 1 – 5 years or you can get a lifetime tracker, which will last for as long as your mortgage.

If you get a tracker mortgage for a limited time, when it comes to an end, you’ll usually be moved to the lender’s standard variable rate – and you could end up paying more every month.

This can be a good time to look around and assess your options – you could possibly look to remortgage your property with another tracker mortgage, or you could find a fixed-rate deal which works for you.

If you decide to go for a fixed-rate deal, you may not have to find a new mortgage provider. The lender who originally arranged your tracker mortgage may also have some fixed rate products suitable for you.

What’s a collar rate and how low can my tracker mortgage payments go?

More and more mortgage lenders have started to put a collar rate on their tracker mortgages. This basically means that your rate can’t go below a certain minimal level.

This means if interest rates drop dramatically, your monthly mortgage payments won’t suddenly decrease as well – there’ll be a "collar’ on your rate to make sure it won’t follow interest rates to their lowest point.

Advantages of getting a tracker mortgage:

  • If the Bank of England interest rates drop so will your repayments – notwithstanding collar rates
  • If interest rates increase and you want to switch to a fixed-term mortgage, some providers may let you
  • switch without charging you a fee
  • Introductory rates can be very good, and your repayments can be minimal
  • Early Repayment Charges can be more affordable when compared to other types of mortgage

Disadvantages of getting a tracker mortgage:

  • If the base rate goes up, your monthly payments can also increase
  • Collar rates mean that even if the base rate falls to record lows, your mortgage repayments won’t follow suit – the minimum amount you pay will be capped
  • If you remortgage during the introductory period or you want to repay your mortgage in full, you may be charged

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