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 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.
Would a base rate decrease mean lower mortgage payments?
The base rate is set by the Bank of England's Monetary Policy Committee, who meet once a month to vote on what the rate should be.
This means the base rate could potentially change 12 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.
- Find out more: mortgage interest calculator - see how a rate rise would affect your payments
Libor-based tracker mortgages
Some tracker mortgages follow the London Inter-Bank Offered Rate (Libor) rather than the base rate, though this is more common for buy-to-let mortgages.
Libor is the rate banks charge to lend money to each other. It changes slightly from day to day but has hovered around the 1% mark since 2018.
Libor trackers are far less common than mortgages tracking the Bank of England base rate. And Libor itself is due to be phased out by 2021, meaning Libor tracker mortgages are on their last legs.
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 0.75%, even if the base rate fell to 0%, you'd still pay at least 0.75% interest.
Moneyfacts research in August 2019 found that nearly one in 10 tracker mortgages had a collar. Nearly all of these collars were set at the initial rate, meaning your interest rate would only ever be the same as or higher than it was at the start.
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.
Best tracker mortgage rates
In July 2019, the tracker mortgages with the lowest rates were at base rate +0.54%, working out at 1.29%.
The deals with the highest rates were base rate +4.69% - so 5.44%.
The average initial rate for a tracker mortgage, across all deal lengths, was 2.32%.
The table below shows the average rates for each length of tracker mortgage deal.
|Initial deal period||Average interest rate||Number of deals|
Source: Moneyfacts, 26 July 2019
As you can see, the average rate for a two-year tracker mortgage is 2.09%.
Two-year deals vastly outnumber other deals, and the increased competition between lenders means that you can also get the lowest rate by opting for a two-year product.
Lifetime trackers, the second-most common, are far more expensive at 3.47% on average.
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 example, in July 2019, the average initial rate for a two-year tracker mortgage was 2.09%, while the average SVR paid by people at the end of a two-year tracker deal was more than double that at 4.28%.
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.
When we checked in July 2019, the average initial rate for a two-year tracker mortgage was 2.09%. For a two-year fixed-rate mortgage it was 2.73%.
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.
On the other hand, fixed-rate mortgages will nearly always 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.
- Find out more: mortgage types explained
Pros and cons of tracker mortgages
- 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.
- 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.