What is a tracker mortgage?
A tracker mortgage is a type of variable rate mortgage. Its interest rate ‘tracks’ (meaning it moves in relation to) an external existing interest rate e.g The base rate set by the Bank of England. This differs from a Standard Variable Rate mortgage which, although it is decided in relation to external factors, is set solely by the lender For example, if your tracker mortgage deal is described as ‘Base rate +0.50%’ it means that your mortgage will always charge interest at 0.50% above the base rate. When the base interest rate increases, your monthly mortgage repayments will go up, and when the rate decreases, they will go down. So, if the Bank of England rate is 1.75%, your interest rate is 2.75%.How often will the monthly payments change?
Your mortgage repayments can change once a month, and in times of economic instability, this can happen, however, it is unlikely. The Bank of England decides whether to change its base rate on the first Thursday of each month. Before deciding on any mortgage type, it is important that you are aware of current rates and how/if they will affect your monthly repayments - this is especially important with a tracker mortgage. It also isn't guaranteed that your rate will always drop if the reference base rate drops. This is because some tracker mortgages have an interest rate collar, which is a minimum rate that it can’t be reduced to. Beware of tracker deals where the collar is set to the initial rate that you pay, as this means you can never benefit if the base rate falls. Search for a deal that can fall, as well as rise so you don’t miss out on these benefits.Benefits of a tracker mortgage
- If the base rate falls, so will your repayments unlike with a fixed-rate mortgage which will stay the same over the term even if rates fall
- When interest rates are low, a tracker mortgage can be cheaper than fixed-rate deals
- It may be easier to overpay on your mortgage - meaning your mortgage is paid off quicker with less overall interest
- A tracker rate only changes when the rate it is tracking changes - this protects you from your lender suddenly raising your rate.
Disadvantages of a tracker mortgage
- If the base rate increases, your rate will too, meaning your monthly repayments will rise.
- Tracker mortgages can make it harder to budget if you don’t know exactly what your repayments will be from month to month.
- If your deal has a collar which is set at your initial interest rate, you won’t benefit
- If you need/want to get out of your deal early, you may have to pay an early repayment charge.
