Tracker Mortgage Explained [Definition, How It Works & More]

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Mortgages are complicated, and matters get even more confusing when considering the various mortgage types. This article addresses what tracker mortgages are, how they work, and the pros and cons of these types of mortgages.

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What Is a Tracker Mortgage?

A tracker mortgage is a variable mortgage that tracks the base rate imposed by the Bank of England. The interest rate on this mortgage changes each time the base rate fluctuates, so your mortgage payments can likewise shift each month.

It’s crucial to remember that tracker interest rates do not match the base rate; they’re one margin above the rate. Typically, the introductory rate is 1.00% higher than the current base rate. So if the base rate is 0.75%, the total interest would be 1.75%.

Once the introductory rate period ends, the lender will switch the mortgage to a higher margin rate or the standard variable rate (SVR).

How Does a Tracker Mortgage Work?

As noted, tracker mortgages follow the base rate, meaning that you can’t plan your monthly repayments. The amount you pay will fluctuate—paying more if the rate goes up but possibly paying less if the rate goes down. Before opting for one of these mortgages, be sure that you can afford to make the monthly payments, even if the rate increases.

The tracker mortgage meaning also includes an introductory period, during which the interest rate percentage is fixed. If you wish to overpay during this period, keep in mind that most lenders impose an early repayment charge. But once the introductory period ends, most lenders allow you to overpay without any additional charges. You can even remortgage or pay off the entire mortgage debt early—unless you’re on a lifetime tracker mortgage, where additional charges are added if you repay early.

Collars and Caps

Are there other elements involved in the question, what is a tracker rate mortgage? This type of mortgage also includes collars and caps. A collar (collar rate) represents the predetermined minimum interest rate, which ensures your rate does not go below a certain level, even if the base rate drops to its lowest point. If the rate drastically falls, your payments won’t go lower than the predetermined minimum rate. For example, if the base rate goes down to 0.1%, but your mortgage has a collar of 0.5%, you still need to pay at least 0.5% in interest.

So what is the tracker mortgage maximum? The maximum interest rate of this mortgage is called a cap. Not all mortgages have a cap, but those with it have it for typically two to five years. Mortgages with caps also have higher initial rates, adding to the security the cap provides. For example, if the cap is 3% and the rate goes up to 4%, you would still pay only 3% interest.

DID YOU KNOW? When applying for a mortgage, you need to provide proof of earnings so that lenders know how much you’re eligible to borrow. In most cases, the amount borrowed is your annual income times four.

Tracker Mortgage Interest Rates

What’s the tracker mortgage interest rate? Though there is no set interest rate on a tracker mortgage, the general rule is that the rate is set one level above the bank’s fixed rate. For example, if the interest rate on a mortgage is 1.00%, this means that you must pay the Bank of England’s base rate, plus the 1.00%.

  • Mortgage interest rate: 1.00%
  • Bank of England base rate: 0.5%
  • Total interest: 1.5%

Remember, the question (what’s a tracker mortgage?) doesn’t involve a set interest rate. So you need to know the base rate at all times while you pay off the mortgage.

DID YOU KNOW? The Bank of England’s interest rate was lowest in 2020 when the base rate fell to 0.1% due to the coronavirus pandemic. The bank’s highest rate was 17% in 1979.

Key Takeaways

Tracker mortgages track the base rate set by the Bank of England.
Whenever the base rate changes, the mortgage interest rate changes.
A collar is the minimum interest rate. A cap is the maximum interest rate.
Tracker mortgages can last for a few years, but lifetime tracker mortgages can extend for the loan duration.
Tracker mortgages have a low or no early repayment charge, while other mortgage types have high early repayment charges.

How Long Do Tracker Mortgages Last?

Once the tracker mortgage meaning has been made clear, many often wonder how long tracker mortgages last.

In most cases, tracker mortgages are approved for an introductory period lasting between one and five years. When this period ends, most lenders switch you to the SVR, which continues until you’ve paid off your mortgage.

The Standard Variable Rate is higher—so your mortgage payments will also be significantly higher. After the tracker period ends, you can reassess your options by looking for a fixed-rate mortgage with lower interest or consider remortgaging your property with another tracker mortgage. Just keep in mind that getting a remortgage can incur additional costs.

What Is a Lifetime Tracker Mortgage?

Lifetime tracker mortgages are mortgages that track the base rate for the entire duration of your loan. This, however, is often considered risky because it’s difficult to predict how and to what degree the rate will fluctuate in the long term. Another disadvantage to lifetime trackers is higher rates compared to shorter-term tracker mortgages.

DID YOU KNOW? Most homeowners in the UK purchase their homes with a mortgage, causing debt levels to rise. The average mortgage debt is £137,934 per UK household, while the average monthly repayment is £723.

Advantages and Disadvantages of Tracker Mortgages

What is a tracker mortgage in regards to its pros and cons? Before applying for such a mortgage, consider the following pros.

Advantages

  • Repayments drop as the rate drops
  • Ability to switch to a fixed-rate mortgage if rates increase significantly
  • Very low introductory rates
  • Early repayment charges lower than other mortgages
  • Lower arrangement fees

Disadvantages

  • Monthly payments increase as base rate goes up
  • Collar rate doesn’t allow payments to go lower than a set level
  • Remortgage and early repayment charges during introductory period
  • Must pay higher tracker rate or SVR at the end of the introductory period

Once you consider the positives and negatives with the question, what is a tracker rate mortgage, you can decide whether this is the right course of action for you.

DID YOU KNOW? The cheapest location to buy a house in the UK is Middlesbrough, where the average home costs £54,978. The most expensive is in Kensington, London, where the average property costs £2,637,720.

Tracker Mortgage Comparisons

Consider the following other mortgage types offered by lenders compared to tracker mortgages.

Tracker Mortgage vs Fixed-Rate Mortgage

What’s a tracker mortgage compared to a fixed-rate mortgage? For starters, the mortgage payments of fixed-rate mortgages don’t change. You pay a predetermined rate during the introductory period—which can increase, but the payments are still fixed.

Unlike tracker mortgages, the fluctuations of the base rate don’t influence the rates of fixed-rate mortgages, which can be good or bad. But the one aspect of how tracker mortgages dominate is their early repayment charge (ERC). Most tracker mortgages either have a low ERC or no ERC, while fixed-rate mortgages often have high ERCs.

Tracker Mortgage vs Variable Mortgage

You also may ask, what is the tracker mortgage compared to the variable rate mortgage? With a variable mortgage, a lender sets their own rate that’s not connected to the base rate. Lenders have the freedom to adjust the rates, meaning that your payments can change at any time.

On the other hand, Tracker mortgages need to follow the base rate, which means they’re usually cheaper than variable-rate mortgages.

DID YOU KNOW? Getting a mortgage with a CCJ (County Court Judgement) may be more challenging, but it’s not impossible. Some lenders specialise in providing mortgages to those who have received a CCJ in the past.

Conclusion

How does a tracker mortgage work? Our guide has aimed to help you understand the advantages and disadvantages of tracker mortgages and how they compare to other mortgage types. If you apply this information and are confident that the base rate will remain low, consider applying for a tracker mortgage.

FAQ

Is tracker mortgage a good idea?

A tracker mortgage is a good idea when the base rate is low and has been steady for a certain period.

What is the difference between a fixed rate mortgage and a tracker mortgage?

The main difference between fixed-rate mortgages and tracker mortgages is that a fixed-rate mortgage has a fixed interest rate for a specific time, while the tracker mortgage rate constantly changes.

What is the difference between variable and tracker mortgage?

What is a tracker mortgage compared to a variable rate mortgage? The variable mortgage rate is decided by the lender’s SVR, while the tracker mortgage rate is determined by the Bank of England’s base rate.

ABOUT AUTHOR

Alex is an IT wizz gone SEO gone fire-juggler. We’re not even joking. When he isn’t researching why one personal loan is better than the other and which piece of hardware you should buy next, he’s rollerblading or selling homes (because he does that, too, the smarty-pants).

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