What is a tracker mortgage?
A tracker mortgage is a type of variable-rate mortgage, meaning the amount of interest you pay each month could change.
The interest rate of a tracker mortgage is tied to an external factor - usually the Bank of England’s base rate - at a set percentage above or below it.
The base rate is currently 0.75%. 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. And if the base rate went down, you’d benefit as the interest rate you pay on your mortgage would fall.
Which? Mortgage Advisers can explain your options and find you the best deal.
How do tracker mortgages work?
Often, a tracker mortgage will be tied to an external factor for a set period (e.g two or five years). But it’s also possible to get deals that will continue to track this factor for the lifetime of your loan (a ‘Lifetime’ tracker).
Longer-term tracker mortgages may have a higher interest rate than those with shorter set periods.
Because a tracker mortgage is a type of variable-rate mortgage, the total amount that you pay each month could change.
When you repay your mortgage, 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 increase because of a rise in the Bank of England base rate, the extra money you pay goes towards the higher interest rather than the capital. So you would be paying more each month, but wouldn’t be paying off more of your mortgage.
Tracker mortgages can have a minimum interest rate, known as a ‘collar’ or ‘floor’ - even if the base rate falls below this minimum, your interest won’t go any lower. When we checked in July, around one in 10 tracker mortgages had a collar.
A tracker mortgage can also have a maximum interest rate, known as a ‘cap’, that your interest rate cannot go above if the base rate rises. You should always check whether a tracker deal has a collar or cap.
What happens when your tracker mortgage ends?
Tracker mortgage deals are usually offered 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 this timeframe comes to an end, your lender will usually transfer you onto its standard variable rate automatically. Typically this will be a higher interest rate, which means that your monthly repayments will increase.
Pros of tracker mortgages
- Tracker mortgages tend to be most attractive when the base rate is low - and the base rate has been under 2% since 2009, well below levels seen in previous decades.
- You’ll be certain to benefit from decreases to the base rate, as your interest will go down.
- A low interest rate on a tracker mortgage could be a good opportunity to make over-payments. This means you either pay off your mortgage quicker or reduce your monthly repayments, paying less interest in total.
- Some tracker mortgages don’t have an Early Repayment Charge if you want to remortgage or change lenders.
Cons of tracker mortgages
- The interest rate on a tracker mortgage changes with the base rate, so your monthly repayments can go up or down.
- A tracker mortgage will have a higher interest rate when the base rate is raised - and the base rate has begun to creep up since November 2017.
- There may be an Early Repayment Charge if you switch or pay off your mortgage before the tracker deal ends.
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 rises, and 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, without having to pay an Early Repayment Charge (ERC).
If you prefer to have 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.
Tracker mortgages vs fixed-rate mortgages
A variable-rate mortgage can sometimes be cheaper than a fixed-rate mortgage. This is because, with a fixed-rate mortgage, you typically pay extra for the security of having a fixed interest rate.
But 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.
Compared to a variable-rate mortgage, the total amount you pay each month doesn’t go up or down if you have a fixed-rate mortgage. So if you prefer to know exactly how much your outgoings will be each month, or if you’re on a tight monthly budget, you might prefer a fixed-rate mortgage offer.
Tracker mortgages vs other variable-rate mortgages
Tracker, standard variable rate (SVR) and discount mortgages are all types of variable-rate mortgages, where the interest rate you pay each month could go up or down. But there are differences in how the interest rate is set.
With a tracker mortgage, your interest rate changes if the Bank of England base rate changes.
If you have a standard variable rate mortgage, the interest rate (the SVR) is set by the lender, which it can raise or lower by any amount and at any time. And with a discount mortgage, the interest rate you pay is a discount on your lender’s SVR.
The SVR is often influenced by changes in the base rate but the two are not directly linked - the base rate is one of a range of factors the lender will consider when setting or adjusting its rates.
By contrast, if you have a tracker mortgage, you’ll be able to predict how changes in the base rate will affect your mortgage payments.
Correct as of date of publication.