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- How does a tracker mortgage work?
- How long does a tracker mortgage last?
- Tracker mortgage pros and cons
- What are tracker mortgage collars and caps?
- Can you leave a tracker mortgage at any time?
- What happens at the end of a tracker mortgage?
- Is a tracker mortgage a good idea now?
- Is a fixed rate or tracker mortgage better?
- Do tracker mortgages always link to the base rate?
- Can first-time buyers take out a tracker mortgage?
A tracker mortgage is a home loan where the interest rate you pay automatically moves in line with another rate, most likely the Bank of England base rate. This means you may want to consider a tracker mortgage if you think that the base rate might fall or that tracker mortgage rates are already low compared to other types of mortgage. However, as with all variable rate mortgages, interest rates on tracker mortgages can rise as well as fall. Therefore it’s vital to consider whether your finances could withstand an increase in your monthly mortgage repayments if this were to occur.
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How does a tracker mortgage work?
The interest rate you pay on a tracker mortgage is usually priced a certain amount of percentage points above, or sometimes below, the rate it is linked to.
For example, if you have a tracker mortgage set at base rate plus 1.5% and the base rate is 4%, the interest rate your monthly repayments is based on would be 5.5%. If the Bank of England then increased the base rate to 4.5%, your mortgage interest rate would rise to 6%.
It’s crucial to understand the impact any change in interest rate could have on your monthly repayments. Using the example above, if you have a £200,000 mortgage on a capital repayment basis that you’re repaying over a 25-year term, and the base rate rises by 0.5 percentage points as described, your monthly mortgage repayments would increase by around £60 a month, or £720 a year. Use our mortgage interest rate calculator to work out how rate changes could affect you.
» MORE: See current mortgage rates
How long does a tracker mortgage last?
A tracker mortgage typically lasts for either two, three, five or perhaps 10 years, and will follow movement in the base rate for the chosen period of time. Once a tracker deal ends, a lender will usually move you onto its standard variable rate (SVR), which is likely to be higher. This can be avoided if you remortgage to a new deal.
There are also some tracker mortgages that will last for your entire mortgage term – these are called lifetime tracker mortgages. However, think carefully about the difficulty of predicting where interest rates might be by the time your mortgage ends before taking out a lifetime tracker. Often lifetime tracker mortgages will have the highest tracker interest rates as well.
What is the difference between a tracker mortgage and a standard variable rate mortgage?
The main point of difference is that the rate on a tracker mortgage will only ever change if the base rate, or other rate it is linked to, changes, whereas a lender can alter its standard variable rate (SVR) whenever it wants. A lender may adjust its SVR to reflect changes in the base rate, but they don’t have to, and have discretion over the timing and extent of any change.
How are tracker mortgages different to fixed rate mortgages?
With a tracker mortgage your interest rate, and mortgage repayments, have the potential to go up or down, whereas with a fixed-rate mortgage, the rate you pay is guaranteed to stay the same for the period of time you’ve fixed. This is typically two- or five-years, but could be longer or somewhere in between. This can give you certainty that your monthly repayments won’t rise during the fixed-rate period, but does mean you’ll miss out on lower repayments if interest rates generally were to fall.
Tracker mortgage pros and cons
No mortgage decision should ever be taken lightly, but with a tracker mortgage, the potential for your monthly payments to change could work to your advantage or it may not.
Advantages of tracker mortgages
- Low rates: Tracker mortgages may offer lower initial rates than fixed-rate mortgages.
- Your repayments may fall: If the base rate falls, your repayments, and the cost of your mortgage, will usually also fall.
- Flexibility: Some tracker mortgages don’t have early repayment charges if you want to move or pay off your loan early.
- Cap your rate: Some tracker mortgages come with a cap which means there will be an upper limit to the rate you could pay.
Drawbacks of tracker mortgages
- Uncertainty: Your monthly repayments will change if the interest rate moves.
- Your repayments could rise: You will usually have to pay more if interest rates rise, and there will be no maximum to what this might be if your mortgage doesn’t have a cap.
- Rate collars: Some tracker mortgages have a collar which the rate you pay can’t drop below. This means there may come a time when a drop in the base rate doesn’t result in a decrease in your payments.
» MORE: Best mortgage lenders
What are tracker mortgage collars and caps?
Some tracker mortgages come with a collar rate. This means your interest rate can’t fall below a set minimum and protects the lender in case the base rate falls very low or even into negative territory. So if the base rate falls below your collar rate, your interest rate and monthly repayments won’t drop any lower.
It may also be possible to get a tracker mortgage with a cap. This is the opposite of a collar and means your interest rate can’t rise beyond a certain level, no matter how high the base rate goes. A tracker mortgage with a cap tends to have a slightly higher interest rate because it provides borrowers with some protection against rising rates.
Can you leave a tracker mortgage at any time?
You can leave a tracker mortgage at any time, but it’s important to check if early repayment charges or an exit fee are payable for doing so. Many tracker mortgages don’t have these charges, meaning you can exit the deal early without penalty. This can be useful if you’re moving home or want the option to switch to a fixed-rate mortgage at some point in the future. If an ERC does apply, charges may be calculated as a percentage of the amount you’re paying off early, which could be hefty.
What happens at the end of a tracker mortgage?
Once an initial period ends, you will automatically move on to your lender’s standard variable rate, or SVR, unless you have already arranged to remortgage to a new deal. This may be another tracker mortgage or a fixed-rate mortgage, and could be with the same or a different lender.
If you decide to stay on the SVR, be aware that your lender can change the rate at any time, regardless of whether the base rate changes. This means your monthly repayments could rise or fall at any time too, and not necessarily in line with the base rate.
As the SVR is generally higher than the final rate you will have paid on your tracker mortgage, it is usually worth checking whether remortgaging is a good idea.
» MORE: Compare remortgage deals
Is a tracker mortgage a good idea now?
Your personal situation is always a crucial factor in choosing any type of mortgage, but you could potentially consider a tracker mortgage if:
- You think the base rate of interest is likely to fall or remain steady going forward.
- Tracker rates are lower than fixed rates, and you want to keep your repayments as low as possible.
- You’re thinking of moving in the near future, and can find a tracker mortgage without early repayment charges that you can exit cheaply.
- You want the flexibility offered by a tracker without early repayment charges to overpay your mortgage, pay it off entirely, or switch to a different deal, penalty-free.
Importantly, all of these rely on your finances being in a position that would allow you to continue to live comfortably if interest rates, and your monthly repayments, increased significantly.
It’s usually a good idea to get in touch with a mortgage broker or talk to a lender if you’re in any way unsure whether a tracker mortgage might be right for you.
If you want to discuss your mortgage options, NerdWallet has partnered with L&C, the UK’s leading fee-free mortgage broker, to offer you expert advice.
Is a fixed rate or tracker mortgage better?
Ultimately this will depend on your financial situation and your attitude towards taking risks.
Fixed-rate mortgages are often more expensive than tracker mortgages. That is because you are paying a premium for the certainty of knowing the interest rate you will pay and that your monthly repayments will stay the same for the length of your deal. But while a tracker can initially be cheaper than a fixed rate, you are taking on the risk of what the underlying interest rate might do. If it is tracking the base rate and that rises during your mortgage deal, you could end up paying more than if you had opted to fix your rate.
It is also worth noting that fixed-rate mortgages usually come with early repayment charges. This means you’ll pay a penalty if you repay the mortgage before your deal ends. In contrast, some tracker deals come without these charges, something which could save you a significant outlay if there is a chance of you moving home during your deal.
» MORE: Fixed versus variable rate mortgages
Do tracker mortgages always link to the base rate?
A tracker mortgage in the UK is most likely to track the Bank of England base rate. However, there may be some which follow a lender’s standard variable rate, which doesn’t have to follow movements in the base rate. In the past, some tracker mortgages followed the London Interbank Offered Rate, or Libor, but this is no longer used as a benchmark for interest rates.
Given the influence base rate movements have on most tracker mortgage rates, it’s important to understand how the Bank of England sets rates. Base rate decisions are the responsibility of the Monetary Policy Committee, which meets roughly every six weeks. The base rate could change at every meeting, meaning the rates on tracker mortgages could change just as frequently. The Bank also has the option to call emergency meetings and change the interest rate at other times, depending on what is happening to the economy.
Can first-time buyers take out a tracker mortgage?
You can take out a tracker mortgage as a first-time buyer, but it’s important to understand the risk that your monthly repayments could rise. If you’d prefer the certainty of knowing what your repayments will be for a set period of time, a fixed-rate mortgage may be a better option.
» MORE: First-time buyer mortgages
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