What is a tracker mortgage?
A tracker mortgage is a kind of variable rate mortgage where the interest rate follows an outside benchmark, almost always the Bank of England base rate. Your rate sits at a set margin above the base rate, and once in a while below it. Say your tracker is base rate plus 1% and the base rate is 4.5%: your mortgage rate would be 5.5%.
A lender’s standard variable rate can be changed whenever the lender decides. A tracker rate is different: it only moves when the base rate moves. That makes it far easier to see how and when your rate might shift.
You can take a tracker for an initial deal period, usually two to five years, and then move onto the lender’s standard variable rate (SVR), the default rate you revert to once a deal ends. A lifetime tracker works differently and follows the base rate for the whole mortgage term.
Types of tracker mortgage
UK lenders offer a handful of variations. A standard tracker runs for a set period, usually two or five years, then reverts to the lender’s standard variable rate. A lifetime tracker, sometimes called a base rate tracker, follows the base rate for the entire mortgage term, which might be 25 years or more.
Some trackers include a collar, a floor below which your rate will not fall even if the base rate drops to zero. Others include a cap, a ceiling your rate cannot go above. Capped trackers usually carry a slightly higher margin, which pays for that protection.
Discount trackers are less common. They follow the base rate at a reduced margin for an introductory spell, then revert to a higher margin or the lender’s SVR.
Advantages and risks of tracker mortgages
The big draw of a tracker mortgage is transparency. You know exactly how your rate is worked out, and you can follow base rate decisions in the news. When the base rate falls, your payments drop automatically, with no need to ask. Tracker rates also tend to sit below equivalent fixed rates when the base rate is steady or expected to come down.
The risk runs the other way: your payments rise if the base rate rises. A string of increases can stretch a monthly budget, so you want to be confident you could still cover the payments if rates moved against you.
Before you pick a tracker, weigh up how much room your budget has. If money is tight each month, a fixed rate mortgage might sit easier with you, since the payment never moves. If you have some slack and expect rates to hold steady or fall, a tracker could work out cheaper.
Early repayment charges on tracker mortgages
Most tracker mortgages carry early repayment charges (ERCs), fees for leaving early, during the initial deal period. Switch to another deal, overpay beyond the amount your lender allows, or clear the mortgage in full, and you may face a charge of between 1% and 5% of the outstanding balance.
Lifetime trackers often carry no ERCs at all, which appeals if you think you might want to remortgage later without a penalty. Whatever you choose, check the ERC terms before you commit to a tracker deal.
Is a tracker mortgage right for you?
A tracker mortgage may suit you if you are comfortable with your payments moving, you want to see clearly how your rate is set, and you have enough financial headroom to soak up a rate increase. Trackers look their most attractive when the base rate is expected to hold steady or come down.
At Clearview Mortgage Solutions, our advisers will look at your circumstances and help you decide whether a tracker, a fixed rate, or another mortgage type is the best fit. Contact us for a free, no-obligation consultation.