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What is a tracker mortgage?

Published: 14 February 2023
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Author: Carl Shave - CEO and co-founder
Last updated: 26May2024

When borrowing money on a mortgage, one aspect that you will need to choose is the interests rate you are to be charged.  Lenders offer a variety of schemes, or commonly referred to as products, with one of these being a tracker.  Below is an overview of how a tracker scheme works and how it differs to other types of products available.

Difference between a tracker and fixed rate?

The main difference between these two products is that a fixed rate will give you a guaranteed rate of interest for a given period of time whereas a tracker rate can go up or down.


Difference between a tracker and variable rate mortgages?

A tracker is a variable rate mortgage however, it is just one type of this.  The term variable rate mortgage simply implies that the rate you are being charged can go up or down.  If you are on your lender’s standard variable rate (SVR) this means that you are not on any specific product.

You may be on a discounted scheme whereby the rate you are being charged is discounted off the lenders SVR.  Whist this is similar to a tracker, the way they are priced is distinctly different as a tracker is invariably linked to an external rate rather than the lenders own standard variable rate.


Tracker mortgage interest rates?

The rate you are being charged on your tracker mortgage will be determined by two contributing factors.  The first is what is it tracked to.  Most are tracked to the Bank of England Base Rate as this is seen to be widely recognised however, it is not the case for all tracker schemes.

The other aspect is what is the pricing margin i.e. someone who is on a rate at 1% above base rate will be charged more than someone on a rate of 0.5% above.


How do tracker mortgages work?

The rate you are charged is directly linked or “tracked” to a designated interest rate such as the Bank of England base rate.  The margin the lender applies will in turn determine how much you are charged.

For example, if base rate is 3% and your tracker is 1% above base, then your charge rate will be 4%.  If base rate rises to 3.5% then your charge rate will then be 4.5% still being 1% above. The margin set by the lender may be above or below the designated interest rate chosen to be linked to.


What kind of tracker mortgages are available?

Most tracker mortgages are linked to the Bank of England base rate.  This is used due to its recognition by most and also as a fair indicator for the state of interest rates of the country.

Historically some were linked to LIBOR albeit these were much rarer and are now phased out since LIBOR was ceased, with many of these mortgages now being linked to base rate instead.


How often will monthly payments change?

As most trackers are linked to Bank of England base rate, monthly payments on a mortgage will change as and when this is altered. Base rate is typically assessed once every month so, whilst it is not commonplace, this could mean your payment goes up or down every month.

As mentioned though, frequent changes are not that common but it is something you have to be aware of as it can happen, especially in times of heightened inflation.


How long can you get a tracker mortgage for?

Most products offered by mortgage providers will run for a specific period of time, and typically between 2 to 5 years.  This enables people to review their borrowing needs on a frequent basis and in turn the rate charged throughout the mortgage term.

These terms however can vary and whilst the more common are between 2 to 5 years some trackers may be for a lesser period and indeed some longer with some trackers being available over the full mortgage term.


Who are tracker mortgages for?

As a tracker mortgage is a variable rate, these are typically arranged for those that are happy with the risk of interest rates going up or down.  Some trackers also offer greater flexibility over fixed rates when it comes to being able to repay the loan so, these can also be popular for those knowing they will need to pay off some or all of their mortgage.


What is a collar?

Sometimes on a variable rate mortgage a lender will set a collar or a minimum rate to be charged.  This ensures that even if rates fall below a certain level that the rate the lender can charge the borrower can not drop below a pre-determined level.


What is a cap?

A cap on a variable rate mortgage works in the opposite way to a collar.  These are much less commonplace and is where a lender will guarantee that the rate you are charged can not exceed a certain level if interest rates increase.  These work in a similar way to fixed but still enable the borrower to benefit should rates fall.


Are there fees?

Not all tracker rates will have a fee attached to them.  Trackers are typically priced in the same way as other products whereas the lower the rate offered the higher the fee charged to arrange it.  Always ensure you check all fees when comparing and prior to applying.


Advantages of tracker mortgages

Tracker mortgages are invariably priced slightly lower than fixed rates at the time of applying.  Should interest rates not rise, or rise much, this could ensure you are charged a lower interest rate.

It does also mean that your payment remains in line with market conditions so it’s less likely to come as a shock to the system if interest rates have changed when your tracker deal expires.


Disadvantages of tracker mortgages

With a tracker mortgage being a variable rate the main disadvantage to these is if interest rates rise.  Depending on how much they go up you could find that they become more expensive than a comparable fixed when you applied and worse still, in excess of a budget you are comfortable with.


How can you get the best tracker mortgage deals

The mortgage market is awash with a huge number of products and can be a minefield when you look.  Trackers can also be linked to different designated rates so you need to ensure you are not comparing apples to pears.

Variable rates can also be slightly misleading depending on how quickly a lender updates their products following a rate change i.e. if Bank of England change base rate.  For example, a lender may look more attractive quoting a charge rate that has not yet been updated following a base rate rise.

Ensure you take all of these into account if shopping around yourself or use the services of a mortgage broker who will be more familiar with the market.


Can you get out of a tracker mortgage

As with many mortgage products, if you are being offered a preferential deal it is likely to come with a penalty if the terms are broken during its period.  This includes if it is repaid in part or full or if you switch to an alternative product.  The same rules apply to most trackers.

Do ensure you understand the potential pitfalls of a tracker mortgage in regard to any increases to interest rates as any penalty can be expensive should you wish to change early.  Some lenders now offer a “switch to fix” option on their trackers whereby you can switch to one of their fixed rates at any time without penalty.

Some trackers will also give even greater flexibility where no penalties are charged at all giving complete freedom from day one for any changes including full redemption.

If you think that a tracker mortgage could work for you, but feel you need further advice, our experienced team of qualified mortgage brokers are always on hand to help.

Call us 0808 258 2541