A tracker mortgage is a type of variable-rate mortgage where the interest rate is determined by a base rate. Generally, these mortgages follow the European Central Bank’s or the Bank of England’s base rate. As a result, the base rate that these banks set may affect monthly payments.
Tracker mortgages have the potential to provide lower interest rates than fixed-rate mortgages in specific economic scenarios. Additionally, income and creditworthiness are requirements for eligibility for tracker mortgages. The UK and other European nations are the main markets for tracker mortgages. Furthermore, both variable and adjustable-rate mortgages (ARMs) in the US are based on various benchmarks that set interest rates.
How Does Tracker Mortgage Work
Interest rates for tracker mortgages are determined by another financial institution’s actions. For instance, interest rates on tracker mortgages that are tied to the Bank of England’s base rate increase when the rate does. The interest rates on these identical tracker mortgages will decrease in tandem with a decrease in the base rate.
Tracker mortgage rates are set one percentage point above the European Central Bank or the Bank of England’s base rate. Therefore, the rate on a tracked mortgage will usually be at least 2% if the rate is set at 1%. Tracker mortgages are subject to change, and a low benchmark rate may result in lower interest payments. However, you might also have to pay more if the benchmark rate is higher.
Generally, tracker rates are offered for the first one to five years of the mortgage. However, you might be able to obtain a tracker mortgage for the duration of your loan. You’ll need to arrange for new terms for when it ends if you choose the shorter term. You may:
- To obtain different tracker mortgages, and refinance.
- Switch to a mortgage with a standard variable interest rate.
- To obtain a fixed interest rate mortgage, refinance.
Benefits of Tracker Mortgages
When interest rates decrease, monthly payments and outgoings also decrease. Lenders may allow lower payments to help pay off mortgages quickly and reduce interest. If interest rates increase, switching to a fixed-rate mortgage deal without an early repayment charge can provide stability. This follows the Bank of England base rate, reducing lender discretion.
Disadvantages of Tracker Mortgages
Base rates can affect monthly repayments, and a deal with a collar at the initial interest rate may not benefit from base rate decreases. High initial rates may be possible with a cap on maximum interest rates. Overpayment, early repayment, or switching before the tie-in period can lead to steep early repayment charges (ERC) fees.
Who Needs Tracker Mortgage
If rates are low and you’re a first-time buyer, a tracker mortgage might be a good fit. However, if you’re uncertain about your ability to cover higher payments in case of rate increases, consider a deal with a cap. A tracker mortgage can help you save on interest rates, as buy-to-let mortgages are typically more expensive. UK base interest rates have been historically low, but tracker mortgages may be more appealing when they are higher. Rate cuts are becoming more likely, potentially benefiting those who would be locked into fixed rates.
What Happens When My Tracker Mortgage Expires
Your mortgage interest rate will change to the Standard Variable Rate (SVR) after the initial deal period ends. This means that your rate may increase or decrease based on fluctuations in the interest rate we charge. You will now have the choice to switch to a different rate if you would like your mortgage to not be on the SVR.
How Long Do Tracker Mortgage Last
The duration of your tracker mortgage is entirely up to you; terms usually range from two or three years to the whole term. Once your deal expires, you will automatically transfer onto your lender’s standard variable rate (SVR) unless you choose to remortgage to another tracker mortgage.
What Is a Collar Rate on Tracker Mortgage
An increasing number of lenders are now charging a collar rate for tracker mortgages. This essentially means that there is a minimum level below which your rate cannot fall. This means that if interest rates fall sharply, your monthly mortgage payments won’t drop either because your rate will be protected from falling in tandem with interest rates by a “collar.”
When Is a Tracker Mortgage a Good Idea
Consider a tracker mortgage for early interest rate savings during the first few months of your loan if you can secure a lower rate. By contributing more to the principal balance, you can potentially lower the total interest rate on your mortgage over time.