Tracker Mortgages

Tracker mortgages

Looking for a tracker mortgage deal?

Fair Mortgages can provide you with a first class service if you are looking for a mortgage - If you are currently have a mortgage on a tracker deal coming to an end and you are looking to remortgage or you wish to buy a new property on a tracker contact us to help you get the best deal possible. 

Special features of what we offer include:

• Whole of market broker - we work as an intermediary and work with over 60 UK lenders

• Great Rates - Access to leading rates including trackers

• Market Exclusives - Access to mortgage deals not available on high street

• Our  Expertise - Expert help whether you are a first time buyer or experienced full time landlord

• Credit Issues? - We have lenders who will take into account previous defaults and missed payments 

• Experienced? - Have a complex buy to let or have a portfolio of 5+ properties? - speak to us

To investigate your tracker mortgage options call our specialist team on 0117 403 4474

 or fill in our call back form. 

A tracker mortgage is a type of variable rate mortgage. What makes this type of mortgage different from other kinds of variable rate mortgages is that, rather than following an interest rate determined by the mortgage lender, the rate of interest you pay tracks a set rate, usually the Bank of England base rate, at a fixed percentage above or below it.

For example, you may have a tracker mortgage that offers a fixed rate of 2% above the base rate, and the amount you pay monthly for your mortgage will depend on whether the levels of interest rise, fall or remain static.

Tracker mortgage deals can last for as little as one year, or as long as the total life of the loan – in this latter case, they are known as lifetime tracker mortgages.

Once your tracker deal comes to an end, your mortgage will usually be transferred to your lender's standard variable rate (SVR). This will usually mean paying a higher rate of interest each month, so you may want to consider moving to a new mortgage deal or consider remortgaging with a different lender at this point.

Tracker Mortgages - Complete Guide

Tracker mortgages are one of the UK's most popular mortgage types for homebuyers, but they come with various extra factors to consider when choosing your mortgage deal compared to a fixed mortgage.

Let's take a look at whether they could be right for you.

What is a tracker mortgage?

A tracker mortgage has a flexible interest rate, which follows the Bank of England's base rate. They have an interest rate based on a percentage added to the BOE base rate. As the base rate moves, the mortgage's interest rate moves with it. 

Using the example of the Bank of England base rate of 4% (as of April 2023), the combined interest rate on the tracker mortgage would be 5.5%.

Can be appealing because they are typically cheaper than a fixed or standard variable rate mortgage, but they do come with the added risk that they increase in cost if the Bank of England rate rises, and they can end up being more expensive than a normal fixed rate mortgage. 

A tracker mortgage might be attractive if interest rates are low or expected to drop soon. However, if interest rates increase, it's important to consider the impact this would have on your monthly repayments.

Tracker Mortgage Overview

• Are a type of mortgage that 'tracks' the base interest rate set by the Bank of England

• There are different types, including lifetime trackers and fixed-period trackers

• Your mortgage payments could change with little notice

• Tracker mortgages can have lower interest rates than fixed-rate mortgages but can also lead to higher monthly payments if the base interest rate increases

• Pros include the potential for lower interest rates, flexibility, and the ability to make overpayments without penalty

• Cons include unpredictability, potentially higher monthly payments, and a higher risk of negative equity

If you're considering a tracker mortgage, it's important to weigh whether it's right for your situation and seek financial advice from an independent mortgage broker.

Types of Tracker Mortgage

There are two main types of tracker mortgages - lifetime tracker mortgages and fixed-period tracker mortgages. 

Lifetime Tracker Mortgage

A lifetime tracker mortgage has an interest rate that tracks the base rate for the entire term of the mortgage, typically 25-30 years.

Fixed Period Tracker Mortgage

A fixed-period tracker mortgage lasts for a shorter period of time, such as 2 or 5 years. 

This gives more flexibility at the end of this period to change your mortgage to another provider for a better deal. After the fixed period, the mortgage usually switches to the lender's standard variable rate (SVR).

Tracker Mortgage vs. Variable Mortgage

Many people assume that a tracker mortgage is the same as a variable mortgage, but they are not. The tracker mortgage is a type of variable rate mortgage, although not all variable rate mortgages are trackers.

Variable Mortgage

With a variable mortgage, your interest rate can vary at any time at your lender's discretion. It may go up or down based on changes in the lender's Standard Variable Rate (SVR). Your lender will usually set the SVR at a level that's 2% above the Bank of England base rate, and they can change it whenever they want.

Tracker Mortgage 

In contrast, tracker mortgages are linked directly to the Bank of England's base rate, so the interest rate will move up or down in line with any changes to the base rate.

Overall, a tracker mortgage can offer more stability and transparency than a variable mortgage, as changes to your interest rate will be predictable and not at the lender's discretion.

Tracker Mortgage FAQs:

How Much Do You Pay on a Tracker Mortgage?

You will pay interest on a tracked mortgage based on the interest rate at the time of your mortgage agreement, the base rate set by the Bank of England, and the percentage rate above the base rate set by your lender. 

For example, if your mortgage lender sets the interest rate for your mortgage at 2% above the BOE base rate and the base rate is 4%, your total interest rate would be 6%. Increasing the base rate to 4.5% would result in a 6.5% interest rate on your mortgage, while a drop in the base rate to 3% would result in a 5% interest rate.

What is the Interest Rate on a Tracker Mortgage?

Tracker mortgages are linked to the Bank of England's base rate. In conjunction with changes in the base rate, mortgage interest rates change as well. The interest rate generally rises with the base rate, so if the base rate rises, so too will the rate. 

You can view the current Bank of England base rate on the official website here

What is a collar rate?

If you compare tracker mortgages, you may discover that there is a 'collar rate' applied by the lender. In the UK, some tracker mortgage products have collar rates, which sets a minimum interest rate you, as the borrower, must pay no matter the Bank of England's base rate. As an example, you would still be charged 1% interest on your tracker mortgage even if the base rate fell to 0.5%. 

Are Tracker Mortgages a Good Idea?

Depending on your circumstances, a tracker mortgage may be a good option for you. Among the main advantages are the lower interest rates and the chance to benefit from falling BoE rates.

However, remember that tracker mortgages can be riskier than fixed-rate mortgages. Interest rate increases may result in significant increases in your mortgage payments.

Can be a good idea for those who can afford some risk and want to take advantage of anticipated interest rate falls.

What is Best - a Fixed or a Tracker Mortgage?

Your personal circumstances and attitude to risk will determine whether a fixed or a tracker mortgage is right for you. A fixed-rate mortgage offers the certainty of a fixed monthly payment for a set period of time, while a tracker mortgage offers lower interest rates but at the risk of increased monthly mortgage repayment costs.

Why Do People Get Tracker Mortgages?

A variety of factors contribute to people choosing a tracker mortgage. A tracker mortgage can also be a good option for borrowers who believe interest rates will remain stable or decrease over time.

Pros and Cons of Tracker Mortgages

Here are a few pointers to consider:

Tracker Mortgage Pros:

• The interest rate you pay is lower than a fixed-rate mortgage, especially during times of low base interest rates

• Can benefit from interest rate decreases, leading to lower monthly mortgage payments

• The flexibility of a tracker mortgage can be an appealing option for those who don't want to be locked into a fixed rate for an extended period of time

Tracker Mortgage Cons:

• Potentially higher monthly mortgage payments if the interest rate rises

• It can be more difficult to budget and plan for future mortgage payments, as they can fluctuate unpredictably

• Some tracker mortgages may have caps or collars that limit how much the interest rate can increase or decrease, which can be frustrating for borrowers who want more flexibility

• It may not be the best mortgage option for those who want financial stability and predictability

• Having a tracker mortgage can be riskier since your property value might not increase as much as your mortgage repayments 

Risks of a Tracker Mortgage

Considered one of the riskier mortgage options, here are some of the risks of tracker mortgages to consider when choosing this type.

Increases in interest rates - Can be subject to interest rate increases, increasing monthly mortgage repayments. This can be challenging to budget for and may lead to financial strain for some borrowers

Fluctuating payments - Because the interest rate on a tracked mortgage is tied to the base interest rate, the monthly payments can fluctuate unpredictably. This can make it difficult to plan for future payments and can be stressful for some borrowers

Negative equity -  If the value of the property decreases while the mortgage payments stay the same or increase due to a higher interest rate, borrowers may end up in a negative equity situation, as the amount of interest plus the original loan is greater than the property value, meaning they owe more on the property than it is worth

Affordability - When the Bank of England (BOE) increases interest rates to control inflation, it typically leads to a higher cost of living and borrowing. Therefore, it's important to consider the affordability of increased mortgage payments and other increasing living and borrowing costs. 

How much can the cost of my tracker mortgage change?

The cost of an interest rate change on your mortgage will depend on the amount you owe and the rate at which you borrow.

Impact of BOE Base Rate Changes on a Tracker Mortgage Since March 2020

Based on a £250,000 Mortgage: 

Example of impact of BOE base rate changes since March 2020 to March 2023

Note: This table calculates the mortgage rate by adding 2.5% to the Bank of England's interest rate. The monthly mortgage payment change is calculated by subtracting the previous month's mortgage payment from the current month's mortgage payment.

Again, please keep in mind that this table is for illustrative purposes only, and the actual mortgage payment amounts may vary depending on a number of factors, including the specific terms and conditions of the mortgage agreement, the size and duration of the mortgage, and individual financial circumstances. It is best to speak with a qualified mortgage broker for specific advice.

From March 2020 to April 2020, the mortgage repayments in this example increased from £1132, which would have been affordable during the affordability checks at the time of the mortgage application, to £1,713 - a total increase of £581 per month. The new repayment requirement may now be unaffordable for some people's budgets.

As the Bank of England increases interest rates to control inflation and soaring costs, other living costs are generally expected to increase during this period. This can result in significant financial distress. This situation should be factored in when choosing between a fixed and variable rate mortgage.

Summary:

A tracker mortgage can be a valuable option for borrowers who wish to take advantage of changes in the Bank of England's base rate. As a result, it offers lower interest rates and, therefore, lower monthly payments. However, if the base rate increases, the payments may increase as well. If you decide to take out a tracked mortgage, you should carefully consider your financial situation and the terms of the loan. Make sure you seek the advice of a qualified mortgage adviser before making any big financial decisions.