What is a tracker Mortgage

A tracker mortgage is a type of variable rate mortgage that changes in line with a base rate, usually the Bank of England base rate established by the Monetary Policy Committee (MPC) on a monthly basis. This base rate influences the interest rate for loans offered by mainstream banks, directly affecting the monthly repayment amount for a tracker mortgage.

Similar to fixed-rate mortgages, most tracker mortgages have a term of 2 to 5 years (although longer options are available), after which they switch to the lender's standard variable rate (SVR). It is advisable to keep an eye on the end date of this term and think about moving to a different mortgage option that may be more competitive, whether it is another tracker mortgage or a fixed-rate deal.

The lender specifies the additional interest to be paid above the base rate, for example, as bank base rate plus 2%. This means that with a Bank of England rate of 5.25%, the total rate would be 7.25%. If the base rate increased to 5.50%, the overall rate would be 7.50%, and conversely if the base rate decreased.

How high or low can a tracker mortgage rate go?

Many lenders incorporate a "collar" or "floor" provision in the terms and conditions of the tracker deal, ensuring that the interest rate will not drop below a certain level.

On occasion, lenders may impose a "cap" on the maximum interest payable, a measure aimed at providing borrowers with additional peace of mind. While this feature typically results in a higher initial rate, it proves beneficial mainly in a consistently or rapidly increasing market.

It is also important to assess whether the specific tracker deal under consideration carries an early repayment charge (ERC) during the initial period.

Types of tracker mortgages

While most mortgages are influenced by the Bank of England base rate, there are also tracker mortgages linked to Libor, which stands for London Inter-Bank Offered Rate. Libor reflects the rate at which lenders loan money to each other, typically being more volatile and notably higher than the Bank of England base rate. This type of mortgage is commonly used for specific sub-prime deals and certain buy-to-let products.

Alternatively, borrowers can opt for a lifetime tracker mortgage, which maintains a consistent rate for the entire mortgage term. Although lifetime trackers may not offer the most competitive rates, they do prevent borrowers from being switched to a less favorable standard variable rate, a situation often seen with shorter-term tracker agreements.

Advantages of a tracker mortgage

• The introductory rate on a tracker mortgage can often be lower than other types of mortgages
  

• They may have smaller early repayment charges than similar fixed-rate deals
  

Disadvantages of a tracker mortgage

• Tracker mortgages offer less certainty than a fixed-rate deal making it more difficult to plan your monthly spending

• If rates rise sharply, it could make it difficult to afford the monthly repayment

• If your deal has a "collar/floor", you won't be able to benefit if rates fall below a certain level