Tracker Mortgages Explained

If you are considering a mortgage at the moment, you will undoubtedly be thinking about the interest rate you can achieve and, more importantly, which type of rate to choose. There are three main options available: a tracker rate, a fixed rate, and a variable rate.

This guide explains everything you need to know about tracker rate mortgages and helps you compare them with fixed-rate mortgages. To make things simpler, variable-rate mortgages are typically uncompetitive, which effectively narrows your choice down to two. Let’s explore tracker rate mortgages in more detail.

What Are Tracker Mortgages?

A tracker mortgage has an interest rate that follows the Bank of England base rate. If the Bank of England increases the base rate, your mortgage interest rate will rise. Conversely, if the base rate is reduced, your mortgage interest rate will decrease.

As a result, your monthly mortgage payments can fluctuate over the term of your mortgage, increasing or decreasing in line with changes to the base rate.

How Do Tracker Mortgages Work?

A bank or building society will charge a set margin on top of the Bank of England base rate. For example, if the current base rate is 4% and your lender’s tracker rate is 0.5% above the base rate, your overall mortgage interest rate will be 4.5%.

Your mortgage interest rate will automatically change whenever the base rate changes, according to the terms of your mortgage deal. Most lenders will also send a confirmation email or letter to inform you of any rate changes.

How Often Will My Monthly Payments Change?

Your monthly payments only change if the Bank of England base rate changes. Historically, tracker mortgages could maintain the same interest rate throughout the deal term because the base rate remained low for several years. Recently, with base rate increases, tracker mortgage payments adjust accordingly.

The base rate is set by the Monetary Policy Committee, which meets eight times a year. In rare cases, the committee may meet more frequently during economic emergencies, meaning your mortgage payment could theoretically change up to eight times in a year. In practice, the Bank of England adjusts rates cautiously, so even in volatile times, payments typically change only a few times per year.

Early Repayment Charges (ERCs) for Tracker Mortgages

A significant benefit of tracker mortgages is that many do not have Early Repayment Charges (ERCs). In a market where interest rates may fall, this feature can be very attractive. If your tracker mortgage has no ERCs and rates decrease, you may be able to remortgage to a cheaper deal with minimal costs.

However, some tracker mortgages still carry ERCs, usually lower than those applied to fixed-rate deals.

Advantages of Tracker Mortgages

Tracker mortgages can be advantageous in several scenarios:

• If the Bank of England base rate is low, tracker mortgages are typically cheaper than fixed-rate deals.
• If fixed-rate deals are higher than tracker deals, usually during times of economic uncertainty.
• If the base rate is high but expected to fall, meaning your mortgage could become cheaper over time.
• If there are no ERCs, allowing you to remortgage to a lower rate at minimal cost when market rates fall.

In short, tracker deals can be more competitive than fixed-rate mortgages. You need to weigh your appetite for risk and personal circumstances when deciding.

Disadvantages of Tracker Mortgages

The main risk with tracker mortgages is that interest rates can rise rapidly, with no cap on how high your rate could go. This makes budgeting monthly payments challenging.

The only limit to your tracker rate is the base rate itself. Because the base rate is unpredictable and set based on a wide range of economic factors, you cannot reliably forecast your mortgage payments over the term of your deal.

Types of Mortgage Interest Rates

There are three main types of mortgage interest rates offered by lenders in the U.K.

Tracker Mortgages

A tracker mortgage follows the Bank of England base rate. Your interest rate moves up or down as the base rate changes. When fixed-rate mortgage deals are high, a tracker mortgage can be advantageous, allowing you to benefit from potentially lower interest rates.

Variable Rate Mortgages

Variable rate mortgages have an interest rate set by the lender and can change at the lender’s discretion. When your mortgage deal ends, if you do not remortgage, your rate typically moves to the lender’s standard variable rate (SVR).

Some lenders offer variable rate mortgages for higher-risk borrowers, such as those with adverse credit. Because variable rates can change at any time, they are usually less favourable than tracker or fixed-rate deals.

Fixed Rate Mortgages

Fixed rate mortgages are the most popular type. With a fixed-rate mortgage, you agree an interest rate with your lender, and your monthly payments remain the same throughout the product term.

For example, a 5-year fixed rate at 4% means your monthly payment stays consistent for five years, allowing you to budget confidently and avoid surprises from interest rate changes.

Should I Choose a Fixed Rate or Tracker Rate Mortgage?

Choosing between a fixed rate and a tracker rate mortgage depends on your financial situation and attitude to risk. There is no one-size-fits-all answer.

If you are risk-averse, a fixed rate mortgage may be more suitable, providing predictable monthly payments. On the other hand, some borrowers may prefer a tracker rate mortgage in the hope that the Bank of England base rate falls, which could reduce their monthly payments.

A mortgage broker can explain the advantages and disadvantages of both fixed and tracker rate mortgages, and provide recommendations tailored to your circumstances. At Boon Brokers, we offer free, impartial mortgage advice. Contact us today to discuss tracker rate mortgages and find the best option for you.