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Tracker mortgages

Get to grips with how tracker mortgages work and their pros and cons to work out whether a tracker mortgage is right for you.

In this article
What is a tracker mortgage? Would a base rate decrease mean lower mortgage payments? How do tracker mortgage payments work? How long do tracker mortgage deals last? What are 'collars' and 'caps'?
What happens when your tracker mortgage ends? Tracker mortgages vs fixed-rate mortgages Pros and cons of tracker mortgages Is a tracker mortgage right for me?

What is a tracker mortgage?

A tracker mortgage is a home loan where the interest rate you pay is based on an external rate - usually the Bank of England base rate - plus a set percentage.

The base rate is currently at 0.75%, after increases in December 2021, February 2022 and March 2022.

So, if the interest rate on a tracker mortgage was the base rate +1%, the amount of interest you would pay is 1.75%.

If the base rate went up, the interest rate on your tracker mortgage would also rise.

Would a base rate decrease mean lower mortgage payments?

The base rate is set by the Bank of England's Monetary Policy Committee, which meets eight times a year to vote on what the rate should be.

This means the base rate could potentially change eight times a year (though this would be extremely unusual) - so you need to factor in the possibility of your rate going up multiple times when working out what you can afford to repay.

In some cases, a base rate fall will lead to a reduction in your interest rate. However, the tracker mortgages with the best rates often have a 'collar' (a minimum rate you can pay) set at the amount you're paying at the beginning of the deal.

If you chose a deal with a collar set at your introductory rate, you wouldn't benefit from base rate decreases but would have to pay for increases. 

How do tracker mortgage payments work?

Because a tracker mortgage is a type of variable-rate mortgage, the total amount that you pay each month could change.

With each monthly mortgage payment, part of the money goes towards the interest charged by your lender and the other part towards repaying the money you've borrowed (the capital).

If your monthly payments increased because of a rise in the Bank of England base rate, the extra money you paid would only cover the increased interest charges - so you'd be paying more each month without actually clearing a greater proportion of your mortgage debt.

How long do tracker mortgage deals last?

Often, a tracker mortgage will be tied to an external factor such as the base rate for a set period (usually two or five years), before reverting to the lender's standard variable rate.

However, it’s also possible to get deals that track the base rate for the entire term of your loan (a ‘lifetime’ tracker).

Committing to a longer tracker deal can be risky, as it’s difficult to predict how rates might move in that time. Longer-term tracker mortgages also tend to come with higher rates than those with shorter deal periods.

What are 'collars' and 'caps'?

Some tracker mortgages come with a minimum interest rate, known as a ‘collar’ or ‘floor’ (sometimes set at the deal's initial rate). Your interest rate will never drop below the collar, even if the base rate falls dramatically.

For instance, if you were on a deal that meant you were paying the base rate plus 0.5% but your deal also had a collar of 0.6%, even if the base rate fell to 0%, you'd still pay at least 0.6% interest.

Very occasionally, you might spot a tracker mortgage with a ‘cap’, which is a maximum interest rate.

If your deal has a cap your interest rate will not go above it, regardless of whether the base rate exceeds it, for the duration of the cap (usually two or five years).

Deals offering a cap tend to have higher initial rates, as you're paying for the security a cap offers.

What happens when your tracker mortgage ends?

Tracker mortgage deals usually offer the introductory rate for a limited timeframe. The longer your interest rate tracks the Bank of England base rate, the higher the interest rate tends to be.

When the introductory deal period comes to an end, your lender will usually transfer you onto its standard variable rate (SVR). Typically this will be a higher interest rate, which means that your monthly repayments will increase.

For this reason, it usually makes sense to switch deals by remortgaging at the end of your introductory deal period.

Tracker mortgages vs fixed-rate mortgages

Variable-rate mortgages including trackers are often cheaper than fixed-rate mortgages. This is because, with a fixed rate, you generally pay extra for the security of knowing what your interest rate will be for the duration of the deal.

But once if you factor in a possible rise in the base rate, a tracker mortgage can become more expensive than a fixed-rate deal. So a tracker mortgage that seems cheap now could cost more in the long term.

On the other hand, fixed-rate mortgages often carry an early repayment charge (ERC), meaning you have to pay a hefty fee to exit the mortgage before the end of the initial deal period.

Some tracker mortgages are available without ERCs, so if you're planning to move house in the next couple of years, or you want a cheap rate now with the option of remortgaging if the base rate goes up, this might be the mortgage type for you.

Pros and cons of tracker mortgages

Pros

  • Tracker mortgages are often a good option when the base rate is low, which it has been for several years.
  • If you choose a deal without a collar, or one with a collar set lower than your current rate, you'll benefit from decreases to the base rate.
  • If you choose a deal with a cap, there will be a maximum level your interest rate can't exceed.
  • Unlike fixed-rate deals, some tracker mortgages don’t have an early repayment charge - handy if you want to remortgage or move house.

Cons

  • Trackers are variable-rate mortgages, meaning your monthly repayments can go up with no warning.
  • Deals with caps are rare, and if you do find one you'll pay extra for it via a higher initial rate.
  • If your tracker doesn't have a cap, there's no limit to what you could pay if the base rate shot up.
  • If you choose a deal with a collar, you might not benefit from decreases in the base rate.
  • If you choose a deal with early repayment charges, remortgaging or paying off your mortgage before the deal period ends could cost thousands.

Is a tracker mortgage right for me?

A tracker mortgage could be suitable if you think the base rate will fall or stay low. But you’d need to be comfortable with the risk of your monthly mortgage payments going up if the base rate rose, and confident you'd be able to cover the higher payments.

A tracker mortgage can offer more flexibility than a fixed-rate mortgage. This flexibility means being able to pay your mortgage off early by overpaying, changing your mortgage to another lender, or switching to another product with your existing lender, often without having to pay an early repayment charge (ERC).

If you prefer this kind of flexibility, and can afford higher payments if the base rate rises, a tracker mortgage may appeal to you. Our mortgage interest calculator can help you work out whether you could afford higher payments if the base rate went up.

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