What Is A Tracker Mortgage?

A tracker mortgage is a type of variable mortgage. The interest on it follows or ‘tracks’ another rate – usually the Bank of England base rate. And it’s almost always set at percentage above the rate it tracks.

How does a tracker mortgage work?

With a tracker mortgage when the base rate rises, your monthly payments will increase. When it falls, your payments will be cheaper.

For example, say the pay rate on a tracker mortgage was the Bank of England base rate plus 0.8%. If the base rate was 1%, you’d pay 1.8%. If the base rate climbed to 2%, you’d pay 2.8%.

But if the Bank of England reduced base rate to 0.5%, you’d pay 1.3%.

If the pay rate on your tracker mortgage changes, your lender will write to you, telling you the new rate and your new monthly payment.

What is the Bank of England base rate?

This is the interest rate the Bank of England charges other banks and other lenders when they borrow money. It is sometimes shortened to BEBR.

The base rate (June 2021) is currently at a record low of 0.1%, following cuts made at the onset of the coronavirus pandemic in March 2020.

The Bank of England’s Monetary Policy Committee (MPC) meets roughly every six weeks to vote on whether the base rate should go up, down, or remain the same. Occasionally it holds emergency meetings to adjust the base rate.

Do trackers always track base rate?

The majority of tracker mortgages track the Bank of England base rate.

However, there are some exceptions. Some tracker mortgages follow the London Inter-Bank Offered Rate (Libor). Libor is the rate banks charge to lend money to each other. Tracking Libor is more common for buy-to-let mortgages than residential home loans.

However, Libor is due to be phased out in 2021 so these deals will disappear.

You should also look out for lenders offering mortgage products that track the lender’s own ‘base rate’, rather than the Bank of England’s. Although these rates are likely to be very similar to the Bank of England base rate, it’s not guaranteed.

What’s the difference between a tracker and standard variable rate mortgage?

Each mortgage lender has its own standard variable rate (SVR). The lender can change this rate whenever it wants, although most changes are in line with the Bank of England base rate.

Some banks offer SVR mortgages, but this rate is more commonly used as the go-to rate at the end of a fixed, tracker or discount deal. SVRs are normally higher than the base rate.

Tracker mortgages are linked to an external interest rate, rather than the SVR which is set by the lender.

What’s the difference between a tracker and discount mortgage?

A discount mortgage is where the interest rate payable is at a set amount below the lender’s SVR.

For example, if the lender’s SVR was 2% and the discount was 0.5%, you’d pay 1.5%.

The key difference between a tracker and a discount mortgage is that the pay rate on the tracker is pegged to an external rate (normally the Bank of England base rate), while the pay rate on a discount mortgage is pegged to the lender’s SVR.

What is a tracker collar?

Some tracker mortgages have an interest rate ‘collar’ or ‘floor’. Both of these mean the same thing – it’s the lowest interest rate you will pay on your mortgage. It means that your interest rate won’t fall below a certain level, even if the base rate does. 

For example, say you had a tracker with a pay rate of the base rate plus 0.8%, and a collar of 1%. If the base rate went down to 0.1%, you’d still pay 1% interest on your mortgage.

Not all tracker mortgages have collars, and for those that do it is likely to be buried away in the small print.

What is a tracker cap?

A cap is the opposite to a collar – it’s the highest rate you’ll ever pay on your tracker mortgage.

For example, if your tracker mortgage had a cap of 3% and the base rate went up to 4%, you’d still pay 3% interest on your mortgage.

Caps normally last for up to five years.

How long do tracker mortgages last for?

Some tracker mortgage products last for two, three, five or 10 years. When this period ends, you’ll normally start paying the lender’s standard variable rate (SVR) – which is often higher.

‘Lifetime trackers’ last for the entire mortgage term. Lifetime trackers products don’t usually charge early redemption charges if you want to pay off your mortgage early or remortgage. 

Do tracker mortgages charge fees?

Some tracker mortgages come with an upfront arrangement fee in the same way fixed rate deals often come with a fee.

These fees can vary between mortgage products and from lender to lender. 

When should you choose a tracker mortgage?

You should choose a tracker mortgage if there is wiggle-room in your monthly payment budget and you think the Bank of England base rate will either stay the same or fall. If the base rate falls, you’ll pay less interest on your mortgage.

So, making a decision to get a tracker mortgage depends on what you think the base rate is going to do in the future. But this is very hard to predict – even the experts get it wrong sometimes. 

You should only take out a tracker mortgage if you are confident you could afford higher monthly payments if the Bank of England increased the base rate.

Pros of tracker mortgages

• A great option when the base rate is low, and even better if it falls further

• Payments won’t go up by more than any increase in the Bank of England base rate during the tracker period

• A tracker with a cap can provide security about the highest rate you’ll have to pay

• Most lifetime tracker mortgages don’t have early redemption charges

• Some lifetime trackers allow unlimited overpayments.

Cons of tracker mortgages

• Tracker rates are variable, so if the Bank of England base rate goes up, your monthly payments will too

• If there isn’t a cap on your tracker, there won’t be a limit as to how much the pay rate can increase

• Tracker mortgages with caps normally cost more

• If the tracker mortgage has a collar, you won’t benefit from falls in the base rate once it reaches a certain level

• You may have to pay an early repayment charge if you need to get out of your tracker deal early.