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What Is A Tracker Mortgage?
When you’re shopping around for a mortgage, you’ll often come across tracker mortgages as some of the most budget-friendly options available. You might be wondering if this type of mortgage is right for you and how it stacks up to other options.
A tracker mortgage is a specific type of variable-rate mortgage. It essentially follows or “tracks” an external base interest rate, usually linked to the Bank of England (BoE) base rate.
This is different from a Standard Variable Rate (SVR) mortgage, where your mortgage provider sets the interest rates.
With a tracker rate, your interest rate is the base rate plus a certain percentage added on top. As a result, your monthly mortgage payments may change from month to month. While the Bank of England base rate can change, the additional percentage above it remains the same throughout your mortgage term.
Example: You have a tracker mortgage with a BoE base rate plus 2%. If the base rate is currently 5.25%, you’ll pay 7.25%. If the base rate later goes up to 5.5%, you’d pay 7.5%. However, if the BoE lowers the base rate to 3%, you’d pay 5%.
How long can I get a tracker mortgage for?
Often, tracker mortgages are tied to an external factor, like the EoE base rate, for a certain time – usually around two or five years. When your tracker mortgage comes to an end, you’ll switch to the lender’s standard variable rate – which tends to be a bit higher.
Alternatively, you could go for a “lifetime” tracker mortgage, which means it follows the base rate for the entire time you have your mortgage.
However, there is a catch. Lifetime tracker mortgages can be a bit risky because it is hard to guess how interest rates may change over a long period.
How often will my monthly payments change?
A common question from those considering a tracker mortgage is how often their payments on tracker mortgages will change.
Tracker mortgage repayments can change every month, although this isn’t the most likely scenario.
It’s essential to keep in mind that not all tracker interest rates will decrease even if the base rate drops. This happens because some of them come with something called an ‘interest rate collar’ or a ‘floor’, which sets a minimum rate that the tracker won’t go below.
Tracker Mortgages vs Fixed-Rate Mortgages: Which Is Better?
Many people often find themselves between two options: a tracker mortgage or a fixed-rate mortgage.
While tracker mortgages can change during the deal term, fixed-rate mortgages stay the same – at least for the short term.
Tracker rates are pretty straightforward. They won’t surprise you with hidden costs, unlike some other deals tied to the lender’s SVR. With a tracker, you’ll know exactly what you’re paying after any base rate changes.
If you choose a fixed-rate mortgage, you get stability. Your interest rate likely won’t budget for a set number of years. While this offers peace of mind, it may come with slightly higher payments.
The hard part comes when you are trying to decide which is best for your financial circumstances. Your best option is to consult a mortgage broker or advisor to help you make an informed decision based on your unique situation.
The Pros and Cons of a Tracker Mortgage
The benefits
- Tracker mortgages often start with lower interest rates compared to fixed-rate deals, which can be appealing to budget-conscious borrowers.
- You have the freedom to both overpay and underpay and even repay your mortgage early, all without incurring penalties.
- Certain lenders may let you switch to a fixed-rate mortgage at no extra cost if the base rate experiences a significant rise.
- Tracker mortgage rates are straightforward. They’re linked to an external benchmark, like the BoE base rate, making it easy to see any changes to your monthly instalments.
The drawbacks
- If the tracker’s base rate goes up, your payments will too, which can make them less predictable than other options.
- If you like to plan your finances meticulously, tracker rates may add a bit of unpredictability, as you can’t precisely predict the rate.
- Some tracker mortgages have a rate floor or collar, which means you won’t save if the base rate drops.
- If you decide to leave your tracker mortgage before your deal ends, you may face an early repayment charge.
Is a Track Mortgage Right for Me? – What to Consider Before Deciding
A tracker mortgage can be an excellent choice when you expect the base rate to either remain low or even drop. It’s a tempting option, especially for first-time buyers, if interest rates are currently favourable.
You will, however, need to be comfortable with the idea that your monthly mortgage repayments may go up if the base rate rises. In this case, it’s a smart move to look for a deal with a cap.
With a tracker mortgage, you also have the freedom to switch your mortgage to a different lender or change to another product with your existing lender, often without facing early repayment charges.
If you value this kind of financial flexibility and can manage higher payments in case the base rate increases, a tracker mortgage may be an attractive option.
FAQs
How often does the BoE base rate change?
The Bank of England’s base rate can change up to eight times a year, although this has never happened. The BoE operates through its Monetary Policy Committee (MPC) meetings, which happen eight times a year to discuss and vote on whether to make changes to the base rate.
What are ‘collars’ and ‘caps’ on a tracker mortgage deal?
In a tracker mortgage, a ‘collar rate’ or ‘floor’ is the minimum interest rate you’ll pay, even if the base rate drops. On the other hand, a ‘cap’ or ‘ceiling’ is the maximum interest rate you’ll pay, even if the base rate rises.
Sources:
https://www.forbes.com/uk/advisor/mortgages/tracker-mortgage/