Tracker Mortgages Explained
If you are considering a mortgage at the moment, you will undoubtedly be concerned about the interest rate you can achieve and importantly – what type of interest rate to go for. There are three interest rate types you can choose from, 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 to fixed rate mortgages. To make your life easier, variable rate mortgages are typically uncompetitive, narrowing your choice to two. Let’s explore tracker rate mortgages further.
What Are Tracker Mortgages?
A tracker rate 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 increase. If the base rate is reduced, your mortgage interest rate is reduced.
With this in mind, your monthly mortgage payment is subject to change and can increase or decrease over the term of your mortgage deal.
How do Tracker Mortgages Work?
A bank or building society will charge a set rate on top of the Bank of England base rate. For example, currently the Bank of England base rate is 4%. If a lender’s tracker rate is 0.5% above the base rate, the overall interest rate will be 4.5%.
The mortgage interest rate automatically changes if the base rate changes as agreed in your mortgage deal. Most lenders will also send out a confirmation email (or letter) explaining any rate change.
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How Often Will My Monthly Payments Change?
Your monthly payments only change if the Bank of England base rate changes. Historically, tracker rate mortgages could go for entire deal terms with the same interest rate because the Bank of England kept the base rate low for several years.
Recently, the base rate has been increased by the Bank of England and tracker rate mortgages change accordingly.
The base rate is set by the Monetary Policy Committee that convenes 8 times a year. In rare cases the Monetary Policy Committee meets more frequently, typically if there is an economic emergency. That means in theory your mortgage payment could change 8 times in a year.
In practice, the Bank of England is cautious with rate changes, and you may find even during economically stressful times, the base rate only changes a few times per year.
Early Repayment Charges (ERCs) for Tracker Mortgages
A significant benefit of Tracker Mortgages is that they may not have any Early Repayment Charges (ERCs). In a mortgage market where interest rates may fall over the next couple of years, this can be an attractive product feature.
If you secure a Tracker mortgage product with no ERCs, and interest rates subsequently fall in the market, you may be able to remortgage your product to the cheaper deal without charges (aside from a minimal exit fee).
However, be mindful that some Tracker mortgage products still have Early Repayment Charges, albeit usually lower charges than those applied to Fixed Rate mortgage products.
Advantages of Tracker Mortgages
There are four scenarios when tracker rate mortgages are advantageous.
- If the Bank of England base rate is low – resulting in tracker rate mortgages being cheaper than fixed rate deals.
- If fixed rate deals are higher than tracker rate deals – normally at a time of wider economic uncertainty.
- If the Bank of England base rate is high and is expected to fall, meaning you anticipate your mortgage becoming cheaper over time.
- If there are no ERCs payable, and interest rates fall in the mortgage market, you may be able to remortgage to a lower interest rate at little to no cost at a later date.
In short, a tracker rate deal can be more competitive than a fixed rate deal. You will need to assess whether a fixed rate mortgage deal is best for your circumstances and appetite for risk.
Disadvantages of Tracker Mortgages
Risk is one disadvantage of tracker rate mortgages. Your mortgage interest rate can climb rapidly over your mortgage deal and there is no cap on the amount your interest rate could increase.
The only limit to your tracker rate mortgage interest rate is the base rate itself.
The other key disadvantage is you will not be able to effectively budget your mortgage payments over the deal term. For example, if your interest rate goes up, your monthly mortgage payment goes up.
It is impossible to predict the base rate and the Monetary Policy Committee considers a diverse range of factors before changing the base rate.
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Types of Mortgage Interest Rates
There are three types of mortgage interest rates offered by the lenders in the U.K.
As outlined above, the tracker rate mortgage follows the Bank of England base rate. If fixed rate mortgage deals are high, a tracker rate deal can be advantageous.
Variable Rate Mortgages
Variable rate mortgages have an interest rate set by the lender and are subject to change according to the lender’s requirements. When a mortgage deal ends, if you decide not to remortgage, your interest rate will be a standard variable rate set by the lender.
Some lenders offer variable rate mortgages if a mortgage carries risk, for example if you have adverse credit. Because variable rates are set by lenders and can change at any time, you will usually find them unfavourable compared to fixed rate and tracker rate deals.
Fixed Rate Mortgages
Fixed rate mortgages are the most popular interest rate type. With a fixed rate mortgage, you agree an interest rate with a lender and your monthly payment stays the same throughout your product term. For example, you may have a 4% fixed rate over a 5 year product term. This means each month your mortgage payment remains the same and you can budget for your payment exactly.
Should I Choose a Fixed Rate or Tracker Rate Mortgage?
You should discuss fixed rate mortgages and tracker rate mortgages with your mortgage broker. There is no definitive answer because everyone has different financial situations and attitudes to risk. For example, if you are risk averse, you may not even consider a tracker rate mortgage. Whereas some people will find it opportune to take a tracker rate mortgage in the hope that the base rate falls, resulting in reduced mortgage payments.
Your mortgage broker will be able to highlight the advantages and disadvantages of fixed rate mortgage deals and tracker rate deals. They can also make a recommendation and provide advice specific to your circumstances. At Boon Brokers, we provide free impartial mortgage advice. Contact us today and discuss tracker rate mortgages today.