You can find many residential and buy-to-let tracker mortgages in the market, and they can be a viable alternative to fixed-rate and discount rate mortgages.
But what exactly are they, how do the best tracker mortgages work, and why would you choose one? Read on to find out.
What Are Tracker Mortgages?
Tracker mortgages are a type of variable mortgage where the interest follows or tracks an external interest rate.
Tracker mortgages usually follow the Bank of England’s base rate, and lenders use it to set the interest rate on their mortgage deals.
Mortgages lenders can add or deduct a percentage of interest on top of the base rate.
Your mortgage rate can potentially increase or decrease depending on whether the external Bank of England base rate goes up or down.
How Do Tracker Mortgages Work?
A shift in the base rate can alter the amount you pay each month with a tracker mortgage. If the base rate rises, your monthly payments increase. If it falls, your payments will be cheaper.
For example, let’s assume you get a tracker mortgage where the pay rate is the Bank of England base rate plus 0.9%.
If the base rate were 1%, you’d pay 1.9%. If it climbed to 2%, you’d pay 2.9%.
However, if the Bank of England reduced its base rate to 0.5%, you’d pay 1.4%.
Because of the uncertainty around how much the base rate could change, it’s essential to ensure you can still afford the repayments if they were to increase.
Your lender will write to you informing you of your new rate and monthly payments if the pay rate on your tracker mortgage changes.
What Is The Bank Of England Base Rate?
The base rate is the interest rate that banks and other lenders pay when borrowing from the Bank of England.
It’s the most important interest rate in the UK because it influences most interest rates, including credit cards, savings accounts, loans, and mortgages.
The current Bank of England base rate stands at 1%. It rose from 0.75% on 5th May 2022 to try and control inflation.
It was previously reduced to 0.1% in March 2020 to help control the economic shock of Covid-19.
The Bank of England’s Monetary Policy Committee (MPC) decides the base rate.
They meet every six weeks to vote on whether the base rate should increase, decrease or remain the same depending on government targets. They occasionally hold emergency meetings to adjust the base rate.
Why Choose A Tracker Mortgage?
A tracker mortgage can be a good option if you’re confident the base rate will remain low or fall over the tracker period.
It’s an excellent choice when interest rates are low and steady or high but falling.
Your tracker mortgage will fall by the same proportion if the Bank of England cuts its base rate, giving you lower monthly payments.
Making a decision may depend on what you think the base rate will do in the future.
However, this can be difficult to predict, and even experts get it wrong sometimes. The base rate tends to increase when the economy is doing and decrease during a recession.
With tracker mortgage deals, you can pay less for your mortgage during tough times, but the interest rates can increase when the economy recovers.
Advantages Of Tracker Mortgages
- Great option when the base rate is low or is falling
- Very transparent, and payments won’t go up more than any increase in the Bank of England’s base rate during the tracker period.
- Some tracker mortgages have caps beyond which rates can’t rise, giving you security about the highest rate you’ll pay
- Some allow unlimited overpayments
- Some lifetime tracker mortgages don’t usually have early repayment charges
Disadvantages Of Tracker Mortgages
- Tracker rates are variable and linked to the base rate. If the base rate goes up, your mortgage rate monthly repayments increase.
- If the tracker mortgage doesn’t have a cap, there’s no limit on how much the pay rate can increase.
- Some tracker mortgages have a collar, which is a rate they won’t fall below even if the Bank of England cuts rates that far. Therefore, you may not benefit from falls in the base rate once it reaches a certain level.
- You may face an early exit fee if you need to change your mortgage or exit the tracker deal early. For example, if the interest rates start rising more quickly than you expected.
How Long Do Tracker Mortgages Last?
Lenders usually provide tracker mortgages over a fixed period, either two, three, five, or ten years.
You’ll start paying the lender’s variable rate when the tracker period ends, usually higher.
Lifetime tracker mortgages are also available among many lenders and last the entire mortgage term.
Remember, a lifetime tracker mortgage is not the same as a lifetime mortgage. You can take out a lifetime tracker mortgage and repay over the mortgage term.
With a lifetime mortgage, you can take out equity on your home, and it’s only repaid when you die or go into a care home.
Lifetime tracker mortgages usually have a cap that the lifetime mortgage rate can’t rise above.
You’ll also not pay early redemption charges if you want to remortgage or pay off your mortgage early.
What’s The Difference Between Tracker And Standard
Variable Rate Mortgages?
All lenders have their standard variable rate (SVR). Lenders can choose to change their SVR at any time, and although the changes are usually in line with the Bank of England base rate, they don’t have to be.
Tracker mortgage rates follow the external Bank of England base rate rather than the SVR set by the lender.
Do Tracker Mortgages Charge Fees?
Like fixed-rate mortgage deals, many tracker mortgages come with a set-up fee.
You can find fees like product fees, arrangement fees, or booking fees, which vary in cost.
You can pay the fee upfront or add it to the loan.
Final Thoughts
Tracker mortgages can provide various benefits and savings, especially if the base rate remains low or falls.
Consulting a mortgage broker or advisor can help you get specialist information on the terms, rates, and lenders available in the market to ensure you make an informed decision.
Call us today on 01925 906 210 or contact us. One of our advisors can talk through all of your options with you.
