What is a Tracker Mortgage?

If your current mortgage deal is coming to an end and you're weighing up your next move, you are not alone. This insight explains what a Tracker Mortgage is and helps you decide whether one might be a good option for you.

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Key Takeaways

• Tracker Mortgages adjust their interest rates based on a market benchmark, typically the Bank of England base rate.
• Tracker Mortgages offer potential savings but come with risks like higher monthly payments and early repayment charges.
• Types of Tracker Mortgages include Capped, floored, lifetime, set term, and offset tracker mortgages provide different features and protections.
• Tracker Mortgages offer flexibility but lack payment stability, while fixed-rate mortgages provide predictable monthly payments. Consider your financial stability, goals, and risk tolerance before choosing.

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What is a Tracker Mortgage?

A Tracker Mortgage adjusts its interest rate in line with a market benchmark. The benchmark used by most mortgage products is the Bank of England base rate. On a Tracker Mortgage, if the benchmark Interest rate goes up or down, the interest rate on your mortgage will follow by the same amount.

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How does a Tracker Mortgage work?

A Tracker Mortgage is a Mortgage that adjusts its interest rate in line with a market benchmark. The benchmark used in most mortgage products is the Bank of England base rate. On a Tracker Mortgage, if the benchmark Interest rate goes up or down, the interest rate on your mortgage will follow by the same amount.

If the Bank of England raises interest rates by 0.5%, your mortgage interest rate will rise by 0.5%.

With a Tracker Mortgage, you usually agree to a tracking rate above the benchmark. For example, you might have a Mortgage that tracks at '1% above the bank of England base rate'.

For Example

If you have a tracker of 1% above the base rate, and the base rate is (say) 4%, your Mortgage interest rate will be 5%. Any changes in the base rate will impact your Mortgage, usually from the following month.

Because the rate can move up or down, so can your monthly repayment. Use the calculator below to see how a change in interest rate would affect the monthly repayment on your own balance and term.

Try nudging the interest rate up by 0.5% and then down by 0.5%: on a tracker, when the base rate rises any extra you pay goes towards interest rather than reducing your loan, and when it falls your repayment drops.

Are Tracker Mortgages New?

Tracker Mortgages aren't new, but for a long stretch they weren't very popular. During the years when the Bank of England base rate sat close to zero, it was generally considered that a tracker wasn't worth the risk, as there wasn't much room for the rate to drop further.

As rates have moved higher and become harder to predict, more borrowers have looked again at trackers, particularly where they expect the base rate to fall.

Risks of a Tracker Mortgage

While Tracker Mortgages can offer lower interest rates and the potential for savings on monthly payments, they also carry some risks that borrowers should be aware of.

• One of the main risks of a tracker mortgage is the potential for higher monthly payments. If the interest rate benchmark rises, the interest rate on your tracker mortgage will also increase, which could result in higher monthly payments. This could put a strain on your budget and make it difficult to afford your mortgage.
• Another risk is the potential for early repayment charges. If you decide to switch to a different mortgage product or move house before the end of the tracker period, you may be subject to early repayment charges. These charges can be significant and may outweigh any potential savings from the tracker mortgage.
• Before deciding if a tracker mortgage is right for you, you should think carefully about your finances and how willing you are to take risks. With a tracker, you still agree to a period in your tracker, either 2 years 3,4, or 5. If you want to exit, you will have to pay early repayment charges.

Benefits of a Tracker Mortgage

The uptake of tracker mortgages is increasing, here's what people are taking advantage of:

• Tracker Mortgages will automatically fall when the rates reduce so you can immediately benefit from a cheaper interest rate.
• The rate on a Tracker Mortgage is normally lower than what the lender offers on a standard variable rate.
• Your lender cannot increase rates by more than what the benchmark moves by, as that is your agreement on a tracker.
• Some Tracker Mortgages have a cap, which prevents the tracker interest rate from going over a pre-agreed rate, even if the benchmark rate does.

Types of Tracker Mortgage

Capped Rate Tracker Mortgage

A capped tracker mortgage has a pre-agreed rate that your tracker mortgage cannot rise above, even if the benchmark rate does. This offers you protection should interest rates continue to rise.

Floored Rate Tracker Mortgage

A floored tracker mortgage has a pre-agreed rate that your tracker mortgage cannot drop below, even if the benchmark rate does. You are sacrificing some potential savings in return for normally a more competitively priced mortgage product.

Lifetime Tracker Mortgage

A lifetime tracker mortgage allows you to retain your mortgage tracker terms for the life of your mortgage. Many people have benefitted from lifetime trackers as rates have fallen through the years. On a standard tracker, you renew your terms and tracking rate every 2, 3, 4 or 5 years.

Set Term Tracker Mortgage

A set term tracker is the standard tracker, you agree to track for a set period, ranging between 2-5 years.

Offset Tracker Mortgage

An offset tracker allows you to use some of your savings to offset the interest paid on your Mortgage.

You agree to put your savings into an account with your lender. The difference between your mortgage loan amount and money in the savings account is the amount of debt you pay interest on.

Tracker vs Fixed Mortgage

Tracker Mortgages differ from fixed-rate mortgages. On a fixed-rate mortgage, the monthly payments and interest rates are fixed for a period agreed upfront. On a tracker, interest can change from month to month in line with the benchmark agreed.

Fixed-rate mortgages give you the certainty that you know each month what your repayments will be. This allows you to budget accordingly. It's important to choose a fixed-rate mortgage if you are looking for stability in your repayments.

As a tracker mortgage's interest rate can change from month to month, you have little certainty over what your mortgage repayments will be next month. That can make budgeting tricky.

How often Does a Tracker Interest Rate change?

Most trackers in the UK follow the bank of England base rate, set by the monetary policy committee, and they meet 8 times a year, normally every 6 weeks. The potential for changes in your tracker rate could be as often as every 6 weeks. However, it is discretionary for the bank of England should they decide to meet an additional time. Ultimately, that means your tracker interest rate could change whenever the bank of England decides to change rates.

The committee has 9 members who vote on rate changes, and a majority is needed to move rates. In an active year, the base rate can change several times, so a tracker rate can move more than once over a 12-month period.

Those who are in favour of raising rates are said to be hawkish, whilst those who favour lower rates are known to be dovish.

Is It Worth Going On A Tracker Mortgage?

Deciding if a tracker mortgage is worth it depends on risk tolerance and financial stability. Consider your goals, income stability, and disposable income. Avoid focusing solely on cost. Explore alternatives like consulting a mortgage adviser or extending the mortgage term to reduce repayments.

Here are some factors to consider:

Disposable income and commitments

If you have sufficient disposable income and few financial obligations, riding a tracker mortgage might be suitable. In case interest rates rise, the impact on your finances may be minimal.

Dependents and income stability

If you have a family relying on your sole income and require predictable monthly payments, fixed mortgages would be more suitable for you.

Avoid focusing solely on cost

Choosing between tracker and fixed mortgages shouldn't be solely based on which one is cheaper. Predicting future interest rate movements accurately is impossible.

Ultimately, the decision to opt for a tracker mortgage should be based on your individual circumstances, financial goals, and tolerance for risk.

Is a Tracker Mortgage a good idea now?

With the base rate higher than it was through the 2010s, many borrowers are weighing up whether it will fall further. If you have a tracker mortgage, your repayments would reduce if interest rates fall, but they would rise if rates go up. When deciding if a tracker mortgage is a good idea now, you will need to consider your own personal circumstances. What would happen to your budget and lifestyle if your repayments changed every month? You should consider your view on whether interest rates will be reduced. However, you should more strongly consider how your finances will be impacted.