What Is a Tracker Rate? Understanding Tracker Rate Mortgages
If you’re researching mortgage rates, you may be wondering what a tracker rate is and how it impacts your borrowing.
A tracker mortgage is a type of variable rate mortgage where your interest rate fluctuates with the Bank of England base rate. This means your monthly repayments can either rise or fall over time, depending on the wider economy.
What Is a Tracker Mortgage and Tracker Rate?
A tracker mortgage is a type of variable mortgage that tracks the Bank of England’s base rate. The actual tracker rate is set as a fixed percentage above that base rate. For example, if your lender is offering a tracker mortgage at base rate plus 1%, and the Bank of England base rate is 5%, your mortgage rate would be 6%.
This means your interest is directly tied to the base rate. When rates change, your payments adjust automatically. The decisions that drive these changes are made by the Monetary Policy Committee, which regularly examines the economy and sets the base rate accordingly.
How Does a Tracker Mortgage Work in Practice?
Choosing a tracker rate means your interest rate follows the Bank of England’s, and your repayments on your mortgage will rise and fall.
The deal will typically last for a certain period of time, like two or five years. During this period, your tracker mortgage payments will change whenever the base rate moves. If the base rate drops before the period ends, your mortgage repayments could be reduced. If the rate goes up, the amount you pay will increase.
Tracker Rate Mortgage vs Fixed Rate Mortgage
A fixed rate mortgage provides stability, as your interest rate remains the same for a set period. This means your monthly repayments are always predictable, which makes budgeting easier.
For borrowers who want certainty that they can keep up repayments, a fixed rate product offers safety. However, those who are comfortable with a bit of fluctuation might find a tracker mortgage more appealing, especially if they think the base rate will drop.
Benefits of a Tracker Mortgage
There are some benefits of a tracker that make this option attractive. One of the main advantages is transparency. Because the mortgage tracks the Bank of England, you can see exactly how and why your rate changes. This can make it easier to understand the amount of interest you pay over time.
Another benefit is the potential to cut the amount of interest you pay if the base rate falls. In this scenario, your monthly payments will decrease. Some tracker deals also offer some flexibility, as certain products allow you to repay early without having to pay an early repayment charge.
The Disadvantages of a Tracker Mortgage
Despite the advantages, there are also some disadvantages of a tracker mortgage to be aware of. The main drawback is uncertainty. Because the rate can change, your monthly mortgage payment may increase unexpectedly, which can put pressure on your finances.
Some deals come with a collar rate, which means your rate will not fall below a certain level, even if the base rate drops further. This limits how much you can benefit from falling rates. Also, while tracker mortgages don’t always come with early repayment charges, some do, so it’s always worth checking the terms.
What Happens When Your Tracker Mortgage Ends?
When your initial deal period comes to an end, your tracker mortgage will usually revert to the lender’s standard variable rate mortgage. The standard variable rate (SVR) is often higher than tracker mortgage deals, which can increase your mortgage payments. At this stage, many borrowers consider their options and sort out a new mortgage. This might involve switching to a different tracker deal, a fixed rate mortgage, or finding a new deal. For some, their tracker product may be switched in the middle of the term, subject to the terms of your original agreement.
Can You Get a Lifetime Tracker?
A lifetime tracker is the name for a type of tracker mortgage that runs to the end of your mortgage term. That means your rate stays in line with the Bank of England base rate for the entire time you’re paying off your mortgage.
The benefit of such a product is flexibility over the long term. The downside is that you’re at the mercy of changes in interest rates, so you should be prepared for your payments to go up as well as down.
How to Get a Tracker Mortgage
To get a tracker mortgage, you’ll need to show that you’re in a position to manage the repayments, even if interest rates rise. That means meeting the lender’s affordability criteria and demonstrating that you can pay a higher rate.
Lenders offer a range of tracker deals, each with its own set of terms and conditions. When you’re making an application, your mortgage provider will examine your income, your outgoings, and your credit history to determine how much you can borrow. It’s worth choosing a deal that suits your situation, because the rate you pay can change depending on the mortgage structure.
Important Considerations Before You Apply
Before you commit to a tracker mortgage, it’s worth taking an honest look at your financial situation. How would you cope if base rates start to rise, and would you be able to switch to a new deal?
It’s worth remembering that your home may be repossessed if you fall behind on your repayments, so it’s a good idea to choose a deal that remains affordable, even if circumstances change.
How Eden Hawk Can Help with Tracker Rate Mortgages
Choosing between different mortgages is confusing, especially considering fluctuating interest rates.
As an experienced mortgage broker, Eden Hawk takes the time to understand exactly what you’re looking for in a tracker mortgage and does all the legwork to find the most suitable deals for you.
Eden Hawk compares a huge range of deals from lenders, helping you understand how each option works and how changes in the base rate might affect your repayments. They’ll guide you through the whole process, from first contact to securing your mortgage.
Final Thoughts
A tracker mortgage may be a great choice if you think interest rates will fall, but because your payments can go up or down depending on the market, it’s worth understanding the potential downsides.
By taking the time to understand how a tracker rate mortgage works and seeking expert advice from a qualified mortgage broker, you can make an informed decision and choose the most suitable mortgage for your situation.