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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 Bank of England (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. 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. But first check that your lender allows overpayments, as there's usually a charge if you overpay by more than 10% per year.
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 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. However, lenders set the percentage above the base rate that their products sit at, and this can't be changed throughout the course of the introductory deal period.
For example: The current BOE base rate is 4.5%, a lender may set their tracker at 2% above the base rate, therefore the rate of interest you will actually pay is 6.5%
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
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 deal | The interest rates will remain the same for the full duration of the deal |
| Initial rates of interest are typically cheaper, but can change | Initial 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 check the terms | Most fixed-rate mortgages have ERCs, which means that if you want to remortgage before the end of your fixed term, it could be costly |
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'll 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 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 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, 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, change up to eight times a year on a tracker mortgage. But this is not typical.
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, it’s important to understand the risks associated with remaining on a variable rate for an extended period. Largely that you'll 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
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
Tracker mortgages are directly impacted by changes in the Bank of England base rate. They tend to be slightly cheaper than fixed rates initially, but rate changes over the course of your deal may mean you end up paying more. ”Kellie Steed, Mortgage Content Writer
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