What is a tracker mortgage?

A tracker mortgage is a type of variable mortgage that follows (but doesn’t match) the Bank of England’s base rate. This means the interest rate on your mortgage can potentially go up or down, which could either save you money or cost you money.

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What is a tracker mortgage explained 

How do tracker mortgages work? 

Each month The Bank of England reviews the base rate to decide whether it should go up, down, or stay the same. This is the interest rate at which high street banks and building societies borrow money.

The base rate doesn’t change very often, but it can fluctuate depending on the UK’s economic situation. For example, if the economy is thriving, the base rate my be increased, but if there’s a recession then the base rate may fall as a result.

If you have a tracker mortgage, any changes to the base rate will have a direct impact on your monthly repayments. For instance, if the base rate decreases, you’ll benefit from lower payments, but if it increases, you’ll end up paying more.

Before you apply, you need to consider if you could comfortably afford to cover your mortgage payments if the base rate was to increase.

Bear in mind that with a tracker mortgage, you’re normally charged a percentage of interest on top of the base rate.

For example, if the base rate at the time is 0.1% and you’re offered a rate that’s 2% over the base rate by your mortgage provider, you’ll pay 2.1% interest. If the base rate goes up to 0.25%, you’ll then pay 2.25% interest.

What is the difference between a tracker and variable mortgage? 

A tracker mortgage is one of the two main types of variable mortgages available. The two types being: 

  1. Tracker rate mortgage
  2. Standard variable mortgage (SVR)

Unlike a tracker mortgage where the interest follows The Bank of England base rate, the interest on a SVR mortgage is set by the lender and can change at any time. As a result, the cost of borrowing can be more expensive on a SVR mortgage.

However, there are some benefits to SVR mortgages. For example, you can usually switch to a better deal at any time - without facing any early repayment charges for doing so. They also tend to come with lower arrangement fees than tracker deals (or fixed rate mortgages).

What is a two-year tracker mortgage? 

A two-year tracker mortgage is where you tied yourself in to follow the base rate for two years. After this period is up, you’ll revert to the standard variable rate (SVR) of your lender to pay off the remainder of your balance. This is likely to be more expensive than the tracker rate you were on. At this point you may wish to consider remortgaging to a better deal with more competitive interest rates.

There are deals that last longer than two years. Normally you can get deals for either two, three, five or 10 years. Which ones you’re eligible for will depend on your individual circumstances and the lender’s criteria.

What is a lifetime tracker mortgage UK? 

Some mortgage providers offer tracker mortgages for the whole duration of your mortgage. This is called a lifetime tracker mortgage and tracks the base rate right up until you’ve made your final repayment, without reverting to the lender’s SVR. Early repayment charges don’t usually apply so you can switch to a better deal without any penalties in the future if you wish.

Bear in mind, if you want a longer deal, then you’ll usually end up being charged a higher interest rate (on top of the base rate).

Is early repayment possible with a tracker mortgage? 

Some mortgage providers allow you to pay off your mortgage early, however you may be charged early repayment charges for doing so. You will also face fees if you remortgage before your current deal ends.

What is an interest rate collar? 

Also known as an ‘interest rate floor’, an interest rate collar is a cap applied by your mortgage provider, relating to the lowest amount your interest rate can fall to.

Even if the base rate goes below that amount, your interest rate won’t go any lower than the minimum amount set by your lender. So it’s important that you check the terms and conditions to see if an interest rate collar is stipulated in your mortgage agreement, before you sign up.

For example, if your interest rate collar is 1% and the base interest rate is 1%, your interest rate will be 1%. If the base interest rate drops to 0.5%, you’ll still pay 1% interest.

Fixed or tracker mortgage - which is best? 

Whether or not a tracker mortgage or fixed rate mortgage is best for you depends on your personal financial circumstances.

A tracker mortgage might be right for you these three statements apply to you:

  1. you’ll be able to afford the mortgage repayments if the interest rate increases
  2. you’re eligible for a good introductory rate and can pay off your mortgage during the introductory period
  3. you can find a deal that allows you to switch to a fixed rate mortgage without any fees if the base rate goes up

A fixed rate mortgage could be the best option if these three statements apply to you:

  1. you’re not sure if you can afford your mortgage repayments if the interest rate goes up
  2. you’re worried about the interest rate going up and having a fixed interest rate would be less stressful
  3. you’re only eligible for deals that charge exit fees if you need to switch providers

Are tracker mortgages a good idea? 

If you’re considering getting a tracker mortgage, read our tracker mortgage pros and cons below:

Benefits of a tracker mortgage  

  • only The Bank of England can increase your interest rate – not your lender
  • if the base rate goes down so will the interest rate you pay
  • your mortgage repayments will also drop if the base rate decreases
  • tracker mortgages often have lower introductory rates than other kinds of mortgages
  • you might find it easier to overpay a tracker mortgage, meaning you’ll reduce your balance sooner and pay less interest in total
  • some lenders allow you switch to a fixed rate mortgage without any fees if the base rate increases

Disadvantages of a tracker mortgage  

  • if base rate goes up your interest rate will get more expensive
  • any increases in interest will lead to you paying more in total
  • if your deal includes an interest rate collar you won’t benefit from any potential drop in the base rate below that point
  • you may face early repayment charges for remortgaging, moving home, or overpaying your mortgage before the deal ends
  • you might find it difficult to budget and it can be stressful not knowing exactly how much interest you’ll need to pay in any given month

How do I find the best tracker mortgage? 

You can find the best tracker mortgage rates using these three methods:

1. Using a broker

Brokers (like Ocean) can save you time and money by searching for different deals on your behalf that are tailored to your financial circumstances. Some brokers speak to you over the phone or in branch. Others ask you to find out information and use algorithms to search out a deal for you. It’s up to you which one you prefer.

Make sure you use a broker who searches the whole market not just a small portfolio of lenders, overwise you could miss out on a great deal. It’s also worth combining this research method with others so that you know you’ve covered all bases.

2. Using comparison websites

Comparison websites also compare various deals across different financial providers. You can look at several options all in one place, saving you time.

You should be aware that not all deals and providers are on comparison websites so make sure you don’t rely solely on them.

3. Going direct

You can speak to mortgage providers directly by going in branch, calling them or going online. This is a good way to look at high-street providers you’re already aware of. It’s important that you don’t just look at a few providers as you could risk missing a great deal.

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