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What is a tracker mortgage?

All UK tracker mortgage rates are at a set amount above the Bank of England base rate and follow (or track) the changes in this rate for the duration of the deal.

For example, if your tracker rate mortgage is set to 'base rate +1%' and the base rate is 1.25%, you'll pay 2.25%. If the base rate rises to 1.5%, you’ll pay 2.5%

When you have a tracker mortgage, your monthly repayments rise if the BOE base rate rises and fall if it decreases. Some people feel more comfortable on a fixed-rate deal, because the interest rate stays the same for the full fixed-rate period, but there are advantages to tracker mortgages.

If the base rate goes down, you can continue paying as normal, so your usual payments become slight overpayments. This reduces the total amount of interest you’ll pay overall and can help you pay off the mortgage more quickly. Do check that your lender allows overpayments first, as there is usually a charge if you overpay by more than 10% per year.

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How do tracker mortgages work?

The Bank of England (BoE) base rate – also known as the bank rate – is the interest rate the BoE charges lenders when they borrow money. It, therefore, influences the cost of both mortgages and how much interest you’re paid on your savings. 

Tracker mortgages are directly linked to the base rate, so go up or down whenever it does. Lender’s set the percentage above the base rate that their products sit at, however, and this cannot be changed throughout the course of the introductory deal period. 

For example: The current BOE base rate is 4%, a lender may set their tracker at 2% above the base rate, therefore the rate of interest you will actually pay is 6%

Your interest rate will go up or down by the same percentage that the base rate changes, but the lender's 2% will remain constant. If the base rate fell to 0%, you would therefore pay a mortgage rate of 2% - unless there's a collar on your rate.

Tracker rate mortgages are most commonly taken as an introductory rate, which means that once the introductory period ends you will automatically revert to the lender's SVR (standard variable rate) which is typically higher than any type of introductory deal.

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Difference between a tracker rate mortgage and a fixed rate mortgage

A tracker mortgage is a type of variable rate mortgage, which means that the main different is that the interest rate can change at any time, whereas a fixed-rate cannot.

A tracker rate also differs from other variable rate products, however, in that it directly follows the BoE base rate. SVR and discount rates are determined by the lender, although may be indirectly influenced by the base rate.

The below table lays out the major differences to look at when deciding whether a tracker rate mortgage is right for you:

Variable rate mortgages (Including trackers) Fixed rate mortgages
Interest rates (and therefore your monthly repayments) can change at any time throughout the duration of the dealThe interest rates will remain the same for the full duration of the deal
Initial rates of interest are typically cheaper, but are subject to changeInitial rates of interest are higher than variable rates, but you’re paying for certainty that they won’t increase
You won’t often have to pay ERCs (early repayment charges) to leave a variable rate deal early - although do check the termsMost fixed-rate mortgages have ERCs, which means that if you want to remortgage before the end of your fixed term, it could be very costly to do so

What is a collar rate for a tracker mortgage?

A collar rate is not really something you want to see on a tracker mortgage, as it limits the benefits of you taking on that deal. A collar (sometimes referred to as a floor) is a set interest rate that your mortgage interest rate can never fall below, regardless of what happens to the BOE base rate. 

For example: If your tracker collar rate is set at 1% and the BOE base rate falls to 0.5%, you will still be charged 1% - plus the lender’s percentage above the base rate.

Should I get a tracker mortgage?

If you're comfortable knowing that your monthly payments could rise, then a tracker rate mortgage could potentially save you a lot of money, especially if the BOE base rate starts to come down. 

If you’re cautious then the best tracker mortgages for you are likely to be those with a cap (also known as a ceiling). This is the exact opposite of a collar - your interest rate will never rise above it, regardless of the BOE base rate. These are quite hard to come by, however.

You may pay more for a tracker rate with a cap versus one without one, but they can be helpful if you’re on a set budget. Many buy-to-let investors using interest-only mortgages also make use of tracker rates, as it can help them keep their operating costs low.

Ultimately it’s difficult to choose which is the right mortgage interest type for you, as it depends on personal preference, long term plans and some guesswork. A mortgage broker can help you to make an informed decision and find the best tracker rate mortgage for you.

How often will my interest rate change with a tracker mortgage?

The Bank of England makes decisions on whether to change the base rate eight times a year depending on the state of the economy, with the aim of keeping inflation low. The base rate is set by the bank’s monetary policy committee, which meets a week or so before the decision is announced. 

Your interest rate could, therefore, potentially change up to eight times per year on a tracker mortgage, however, this is not typical. 2022 is a bit of an anomaly, with another increase to the base rate introduced every time the monetary policy committee met, behaviour that has not been seen previously since the late 1980s.

How long do tracker mortgage deals last?

You usually get a tracker deal for the first one to five years of your mortgage, but there are also trackers that last the whole duration of the mortgage term (an average of 25 years). As a tracker is a type of variable rate mortgage, however, it’s important to understand the risks associated with remaining on a variable rate for an extended period - largely that you will only benefit if interest rates fall, not if they rise. 

Are you tied into a tracker mortgage?

The good news is, you’re not always locked into a tracker-rate mortgage like you would be with a fixed-rate product. This means that if rates start to rise you can often switch to another type of mortgage deal without having to pay ERCs (early repayment charges).

Advantages and disadvantages of a tracker mortgage

  • Your repayments will go down if the base rate does - although stay aware of collars

  • They tend to be cheaper than fixed-rate mortgages at the beginning of the deal

  • You could save money compared to a fixed-rate deal

  • Some tracker deals don’t have early repayment charges

  • It can be easier to overpay your mortgage without using additional funds if interest rates fall

  • Your mortgage repayments rise if the base rate does

  • You don’t have any certainty about the cost of your ongoing mortgage repayments

  • A tracker could end up being more expensive than a fixed rate if rates rise

  • If your tracker has a “collar” your interest rate can’t fall below a certain level, which means your benefits are limited

  • Deals with caps offer slightly greater certainty that your interest rates won’t become unaffordable, but are likely to be more expensive. They are also hard to come by

Claire Flynn - Senior Mortgages Editor at Uswitch
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Tracker mortgages are a type of variable deal linked to the Bank of England base rate. They tend to be slightly cheaper than fixed alternatives initially, but rate changes over the course of your deal may mean you end up paying more. ”

Claire Flynn

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