Updated: 15/09/2024
Tracker Mortgage
The question asked a lot is What is a Tracker Mortgage? It’s a product that basically ‘Tracks’ the Base Interest Rate and is a type of Variable Rate Mortgage. A Tracker Mortgage means that your monthly repayments could increase or decrease, along with the interest accumulated on your outstanding loan amount.
Is there a distinct difference between a Tracker Mortgage and a Variable Rate Mortgage?
The difference is that with a Variable Rate Mortgage the Lender can change or set their own Interest Rate each month, whereby with a Tracker Mortgage the rate mirrors the Bank of England’s Base Interest Rate and is not controlled by the Lender.
Is there a difference between a Fixed-Rate Mortgage and a Tracker Mortgage?
Yes, there is, as a Fixed-Rate Mortgage payment would not change in the short term or certainly during the period of the agreement. A benefit of a Tracker Mortgage or certainly a point of interest is that your payments would reduce if the rate were decreased.
What about a Tracker Mortgage and the actual Interest Rates in force?
A Tracker Mortgage would have an Interest Rate slightly above the Bank of England’s Base Interest Rate.
What about the loan periods for a Tracker Mortgage?
Well, they are normally offered as an introductory period, which can be set for anytime between 1 to 5 years. There is also an option for a ‘Lifetime Tracker’ and this would be agreed to cover the whole period of an agreed loan.
What happens at the end of a Tracker Mortgage period?
A Tracker Mortgage like many other loan products will normally be switched to a Standard Variable Rate when it ends, meaning you may pay more each month. It is important to plan around this and get in touch with us before the agreement ends so you do not pay more than you should or have budgeted for.
What are the advantages of a Tracker Mortgage?
Should the Bank of England Base interest Rate decrease, your Tracker Mortgage repayments will follow suit immediately. Another advantage of a Tracker Mortgage is that initial Introductory Rates can be incredibly good, and as an added bonus, your repayments will be lower than a Standard Variable Rate. Also, should you be in a position later on, early Repayment Charges can be more affordable compared to some other types of mortgage products.
What are the disadvantages of a Tracker Mortgage?
- A buyer will be charged an arrangement fee.
- If the Bank of England Base interest Rate rises, so do your monthly mortgage payments.
- A buyer cannot effectively budget.
- Also, should you decide to re-mortgage your property during the introductory period, or you wish to repay your mortgage loan in full, a fee may apply.
Let’s take a look at a Tracker Mortgage against a Standard Rate Mortgage:
Tracker Mortgage Vs Standard Rate Mortgage UK
The Bank of England base rate has shot up this year (2023), which sadly has pushed up mortgage rates. But if you want to benefit from a cheaper deal, you may be interested in a Tracker Mortgage.
A tracker mortgage reflects an external interest rate, usually the Bank of England base rate, plus a set percentage. It can be short or long-term, and is usually available on a remortgage, first-time buyer or moving home basis.
Fixed Rate
Fixed-rate mortgages offer security and stability, with consistent repayments month-to-month for the entire period of your deal. However, they can also be costly. Once your fixed deal ends, you’ll normally be moved to the lender’s standard variable rate (SVR), which will be much higher than your fixed rate. This means your monthly payments will increase too.
Tracker Mortgage
A Tracker Mortgage tracks the Bank of England base interest rate. If the base rate increases, your interest rate will increase as well, but if it falls, your interest rate will fall alongside it. Some tracker mortgages have a ‘collar’ or ‘floor’ that stops your interest rate from falling below a certain level, even if the base rate does. These deals are rarer but a mortgage broker can help you find one.
Variable Rate
A tracker mortgage is a type of variable rate mortgage that tracks a benchmark rate such as the Bank of England base rate (usually 1% or 2% above it). This means the interest rates on these deals are more predictable than those on standard rate mortgages in the UK, as changes are dictated by the base rate rather than your lender’s SVR.
Despite the fact that they are cheaper than fixed-rate mortgages, borrowers with tracker mortgages can expect to see their monthly repayments increase when base rates rise. They must plan their expenses around these base rate changes to avoid paying more than they can afford for a mortgage.
Some tracker mortgages also have a collar or cap that limits how far interest rates go up even if the base rate goes up dramatically. This makes them less risky, but it’s important to double-check your deal for any extra fees.
Introductory Rate
If you’re weighing up whether a Tracker Mortgage is the right option for you, it’s important to understand how they work. Tracker mortgages follow an external rate – typically the Bank of England’s base rate – and alter your mortgage repayments accordingly.
They can either be introductory (usually for a few years at a time) or even over a lifetime. Lifetime trackers tend to have a higher overall interest rate than standard tracker deals but they remain in place for the full term of your mortgage or until you decide to remortgage.
If you are not sure about whether a Tracker Mortgage is the right choice for you and your circumstances, please speak to a specialist mortgage adviser. They’ll explain all the pros and cons of each type of deal based on your own circumstances, helping you to make an informed decision.
Early Repayment Charge
Early repayment charges are a common fee that lenders apply to mortgages when borrowers repay their mortgage early. It can be a significant cost and should be avoided if possible.
There are a number of ways to avoid these charges including:
If you’re on a Tracker Mortgage, some deals will allow you to make unlimited overpayments without incurring an ERC. These typically come with a cap of 10% of your outstanding balance each year, so it’s worth checking what this limit is before making any overpayments.
It’s also important to consider the Bank of England base rate – if the base rate increases, your payments could increase too. The best way to avoid this is by ensuring you have enough savings to cope with higher payments should the rate rise.
Collar Rate
Tracker Mortgages are mortgages that track interest rates such as the Bank of England base rate. They follow these changes and if the base rate rises, your repayments will also go up to match. Introductory tracker mortgages can be among the lowest variable interest rates available and many are also a better option than fixed-rate deals.
However, if the base rate rises significantly it could make these deals less competitive and you should be aware of any Early Repayment Charges that may apply.
These products also come with a ‘collar’, which is a point at which the interest rate cannot go below. This is useful for customers who do not want their payments to increase too much if the base rate goes down, and could help protect them in an environment where rates are rising rapidly.
What is a Tracker Mortgage?
Hopefully, we have answered that question and provided you with the answers, and information you need. Please spend some time looking through our posts, as there is a multitude of great information that will help you through the house buying process.
Updated 2024