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What is a Tracker Mortgage and How Do They Work?

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When you’re looking for a mortgage, you might come across different types, like fixed-rate, variable-rate, and tracker mortgages. In this article, we’ll focus on tracker mortgages. We’ll explain what they are, how they work, and the pros and cons. This will help you decide if a tracker mortgage is right for you.

What is a tracker mortgage?

A tracker mortgage is a type of variable-rate mortgage. This means the interest rate can change over time. However, unlike other variable-rate mortgages where the lender decides the changes, a tracker mortgage follows the Bank of England Base Rate.

The Bank of England Base Rate is the interest rate set by the Bank of England. It affects how much banks and building societies charge for loans and how much they pay on savings.

With a tracker mortgage, your interest rate will be a set percentage above or below the Bank of England Base Rate. For example, if the base rate is 5% and your tracker mortgage is set at 1% above the base rate, your interest rate will be 6%.

How do tracker mortgages work?

Tracker mortgages follow the base rate closely. If the base rate goes up, your mortgage rate goes up too. If the base rate goes down, so does your mortgage rate. Here’s a step-by-step look at how tracker mortgages work:

  1. Bank of England Sets the Base Rate – The Bank of England reviews and sets the base rate every few months. They consider the economy and inflation when deciding whether to raise, lower, or keep the rate the same.
  2. Your Tracker Mortgage Rate Changes – Your mortgage interest rate will change according to the base rate. If the base rate is 5% and your tracker mortgage is 1% above the base rate, you will pay 6% interest. If the base rate rises to 2%, your interest rate will rise to 7%.
  3. Monthly Payments Adjust – As your interest rate changes, so do your monthly payments. If the rate goes up, you will pay more each month. If it goes down, your payments will decrease. In times when interest rates are volatile, your monthly mortgage payment could change, higher or lower, several times a year.
  4. Review Periods – Some tracker mortgages have review periods. This means your interest rate is reviewed at set times, such as annually. Any changes in the base rate during that time will then affect your interest rate and monthly payments after the review.

Pros of Tracker Mortgages

Tracker mortgages are certainly not for everyone, however, due to their simplicity and flexibility they work well for the right customer. Here are several tracker mortgage advantages:

  1. Potential for Lower Payments – If the Bank of England Base Rate goes down, so will your mortgage rate. This can lower your monthly payments. Tracker mortgages can work well in periods of falling interest rates.
  2. Transparency – Because the rate is linked to the Bank of England Base Rate, you can predict how changes will affect your mortgage. There are no hidden fees or sudden changes from the lender.
  3. Early Repayment Flexibility – Some tracker mortgages allow you to make overpayments or pay off your mortgage early without penalties. This can be helpful if you want to reduce your debt faster.
  4. Lower Initial Rates – Tracker mortgages can sometimes have lower initial rates compared to fixed-rate mortgages. This can make them more affordable at the beginning.

Cons of Tracker Mortgages

Tracker mortgages work well for the right customer situation, however, there are also some downsides to consider:

  1. Unpredictability – Your payments can go up if the Bank of England Base Rate rises. This makes it harder to budget since you don’t know exactly how much you will need to pay each month.
  2. No Cap on Rates – Unlike some variable-rate mortgages, tracker mortgages usually don’t have a cap. This means there’s no upper limit on how high your interest rate can go. If the base rate increases significantly, so will your mortgage rate and monthly payments.
  3. Initial Low-Rate Trap – Sometimes, lenders offer low initial rates to attract customers, but these rates can rise sharply when the base rate changes. Make sure you understand the potential for future rate increases.
  4. Economic Dependence – Your mortgage payments depend heavily on the broader economic situation. If the economy is unstable and the base rate fluctuates a lot, your payments can become very unpredictable.

Is a tracker mortgage right for you?

Deciding if a tracker mortgage is right for you depends on your financial situation and your ability to handle changing payments. Here are a few questions to ask yourself:

  1. Can You Handle Payment Changes? – If your budget is tight and you can’t handle fluctuations in your monthly payments, a tracker mortgage might not be the best choice. Consider a fixed-rate mortgage instead for stable, predictable payments. Most first time buyer mortgages tend to be on a fixed rate basis for budgeting purposes.
  2. Do You Have Financial Flexibility? – If you have some financial flexibility and can manage changes in your payments, a tracker mortgage might be suitable. You could benefit from lower payments if the base rate decreases. Tracker mortgages are considered a higher-risk product than a fixed rate deal, however, if you have surplus funds and can afford to take a risk on rates then you may benefit.
  3. Are You Aware of the Risks? – Make sure you understand the risks involved. If the base rate rises, your payments will increase. Be prepared for this possibility and a rise in mortgage payment.
  4. Do You Plan to Overpay? – If you plan to make overpayments or pay off your mortgage early, check if your tracker mortgage allows this without penalties. This can help you save on interest and pay off your loan faster. Many customers like to knock years off their mortgage term by regularly making ad-hoc overpayments, a tracker mortgage provides a great deal of flexibility for this.
  5. Age 60+ Mortgage Options – If you are a more mature customer exploring your options and solutions for a property purchase or remortgage there may be a more suitable products available. Our specialist team will recommend the best mortgage product for you, saving you both time and money.

Conclusion on Tracker Mortgages

A tracker mortgage can be a good option if you want a variable rate that follows the Bank of England Base Rate. It offers potential for lower payments and transparency in how rates are set. However, it also comes with the risk of rising payments if the base rate increases.

Before deciding, carefully consider your financial situation and ability to handle changing payments. Talk to a mortgage advisor to understand all your options and find the best mortgage for your needs.

Remember, it’s important to shop around and get independent advice to make the best decision for your financial future.

For more information and a free, no-obligation mortgage consultation, feel free to contact us. Our mortgage brokers are here to help you find the best solution tailored to your needs.

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About the Author

Malcolm Davidson

Managing Director of UK Moneyman LTD

Malcolm is one of the UK’s most well-known and respected Mortgage Advisors. He is passionate about providing a 5* customer experience and he has also trained and mentored dozens of fellow Advisors in a career that is now in its third decade.

In addition to his day to day duties as Managing Director, Malcolm still gives out mortgage advice and feels lucky that his job is also very much his hobby.

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