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Tracker mortgages

Get to grips with how tracker mortgages work and their pros and cons to work out if it’s the right type of mortgage for you.

In this article
What is a tracker mortgage? How do tracker mortgages work? Tracker mortgage collars Average tracker mortgage rates What happens when your tracker mortgage ends?
Pros and cons of tracker mortgages Is a tracker mortgage right for me? Tracker mortgages vs fixed-rate mortgages Tracker mortgages vs other variable-rate mortgages

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. And if the base rate went down, you’d benefit as the interest rate you paid on your mortgage would fall.

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) - which means that you need to factor in the possibility of your rate going up when working out what you can afford to repay.

How do tracker mortgages work?

Often, a tracker mortgage will be tied to an external factor such as the base rate for a set period (e.g. two or five years). But it’s also possible to get deals that track this factor for the lifetime of your loan (a ‘lifetime’ tracker).

Longer-term tracker mortgages tend to come with higher rates 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.

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.

Tracker mortgages can also track Libor rates - the London Inter Bank Offered Rate. This is the rate banks charge to lend money to each other.

Most Libor mortgages have a three-monthly rate review, which means they are not subject to change as often as those based on a lender's SVR or the base rate.

Libor trackers are less common than mortgages tracking the Bank of England base rate.

Tracker mortgage collars

Some tracker mortgages can have a minimum interest rate, known as a ‘collar’ or ‘floor’, to ensure you're always paying some form of interest to your lender. 

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; it wouldn't go any lower. 

When we checked in November, around 14% of tracker mortgages had a collar.

Tracker mortgages can also have a maximum interest rate, known as a ‘cap’. If your deal has a cap, your interest rate will never go above this cap, regardless of whether the base rate exceeds it.

You should always check whether a tracker deal has a collar or cap.

Average tracker mortgage rates

The average tracker rate on 1 November 2018 was 2.32%, up from 2.18% in December 2017 due to the fact that there have been two base rate rises since that point.

Over the past five years, however, tracker rates have fallen significantly. In December 2013, the average tracker rate was 2.94% - so you can get a better deal now than you could five years ago.

Looking at specific kinds of tracker deals, the average rate for a two-year tracker mortgage was 2.14% on 1 November 2018. This was up from 2.02% in December 2017, but reduced from an average of 2.87% in December 2013. 

These represent much better deals than lifetime tracker rates, which were averaging 3.44% at the time.

Even in December 2017, lifetime trackers were at 3.24%. This is not too different from lifetime tracker rates five years ago, however, as December 2013 saw an average rate of 3.39%.

What happens when your tracker mortgage ends?

Tracker mortgage deals usually offer the 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 this timeframe comes to an end, your lender will usually transfer you onto its standard variable rate. Typically this will be a higher interest rate, which means that your monthly repayments will increase.

At this point, you’ll usually be better off remortgaging to a new deal.

Pros and cons of tracker mortgages

Pros

  • 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 any decreases to the base rate, as your interest will go down.
  • A low interest rate on a tracker mortgage could give you a good opportunity to make overpayments. This means you could pay off your mortgage quicker, paying less interest in total.
  • Unlike fixed-rate deals, some tracker mortgages don’t have an early repayment charge if you want to remortgage or change lenders.

Cons

  • The interest rate on a tracker mortgage changes with the base rate, so your monthly repayments can go up or down with no warning.
  • 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.
  • Depending on the deal you choose, 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 rose, 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, often 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 such as a tracker 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.

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.

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 (or Libor, depending on the deal) 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 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.

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