Choosing the right mortgage is a big decision. And it’s complex. There are lots of different types of mortgages and each type has benefits (and drawbacks). Which you choose depends on your personal circumstances and finances. You might have heard about different types like fixed-rate or variable-rate deals but still be uncertain what each is exactly.

This guide explores what are tracker mortgages, explaining how they work and helping you decide if this type of variable-rate mortgage could suit your circumstances as you look to buy a property in the UK.

 

 

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What are tracker mortgages?

A tracker mortgage is a type of variable-rate mortgage where the interest rate you pay follows (or ‘tracks’) an external base rate. Here in the UK that usually means the Bank of England’s Official Bank Rate, more commonly but less accurately called the Base Rate.

The result of this ‘tracking’ is that the interest rate isn’t fixed over the term of your borrowing; it can go up or down during the deal period, directly impacting your monthly payments.

How do tracker mortgages work?

Now we know a bit more about what are tracker mortgages, let’s dig a bit deeper into how they work in practice. Tracker mortgages are typically set at a certain percentage above the base rate they are tracking.

For example, if the Bank of England Base Rate is 5% and your tracker deal is ‘Base Rate + 0.75%’, your mortgage interest rate would be 5.75%. If the Base Rate changes, your mortgage interest rate changes by the same amount, usually from the following month. This differs from a fixed-rate mortgage where your interest rate and monthly payments stay the same for a set period.

What happens when the base rate changes?

The key feature of a tracker mortgage is this direct link between your mortgage interest rate and the base rate it is tied to.

  • If the Bank of England Base Rate goes up: Your tracker mortgage interest rate will also go up by the same amount, meaning your monthly payments will increase.
  • If the Bank of England Base Rate goes down: Your tracker mortgage interest rate will go down by the same amount, meaning your monthly payments will decrease.
    Lenders usually review the rate monthly and adjust your payment accordingly for the following month.

What to consider with tracker mortgages

Tracker mortgages can be appealing, but it’s important to understand the potential upsides and downsides before deciding if one is right for you.

Pros:

  • Potential for lower payments
    If the base rate falls, your monthly payments will decrease, saving you money.
  • Transparency
    The link to the base rate is usually clear so you know why your rate is changing.
  • Lower starting rates (sometimes!)
    Tracker rates can sometimes start lower than equivalent fixed rates (though this is not guaranteed).

Cons:

  • Risk of higher payments: If the base rate rises your monthly payments will increase potentially significantly impacting your budget.
  • Budgeting uncertainty: Variable payments make precise monthly budgeting more difficult compared to a fixed rate.
  • Potential Fees: Like many mortgages, tracker deals can come with arrangement fees.
  • Early Repayment Charges (ERCs): Many tracker deals have an initial period (e.g. 2 or 5 years) where you’ll face charges if you repay the mortgage early or switch away.

Tracker mortgages also sometimes have a couple of other rates attached to the deal. They’re that common but it is worth taking a moment to understand them. The first of these is known as the “Collar Rate”. This is a minimum interest rate attached to the deal, below which your mortgage won’t fall below even if the base rate drops further. Second is the “Cap Rate” which is essentially the opposite: a maximum interest rate your mortgage won’t exceed even if the base rate rises higher.

Are tracker mortgages right for you?

Ultimately the decision about what mortgage you pick depends on your attitude to risk your financial situation and the current and future economic outlook for interest rates.

However, there are some general situations where a tracker mortgage could be suitable. For example if:

  • You can comfortably afford potential increases in your monthly payments if interest rates rise.
  • You want the possibility of benefiting from lower payments if interest rates fall.
  • You have a good financial cushion to absorb potential payment shocks

However, a tracker mortgage might not be the best choice if:

  • You need payment certainty for budgeting purposes.
  • You are on a tight budget and couldn’t afford significant increases in monthly payments.
  • You prefer the security of knowing exactly what you’ll pay each month for a set period

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about tracker mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation speak to our friendly mortgage advisors today or call us on 01489 555 080 or explore our comprehensive mortgage guide for a more in-depth breakdown.

Your home may be repossessed if you do not keep up repayments on your mortgage.