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What is a tracker mortgage & how does it work?

Updated 03 September 2020

3min read

Nick Green
Financial Journalist

How does a tracker mortgage work?

A tracker mortgage offers you an interest rate that can go down or up, but which is generally lower than a standard variable rate (SVR) mortgage. If rates are low, or likely to fall in the near future, a tracker mortgage may be attractive. However, if rates rise, you’ll pay more each month. Here you can find out more about the pros and cons of trackers.

What are tracker mortgages?

A tracker mortgage is a type of variable-rate mortgage. Its interest rate ‘tracks’ (i.e. moves in relation to) an external interest rate, e.g. the Bank of England Base Rate or the London Inter-Bank Offered Rate (LIBOR). This makes it unlike an SVR mortgage, which has a rate set solely by your lender.

So for example, if your tracker deal is described as ‘Base rate +2%’ it means that your mortgage will always charge interest at 2 per cent above the base rate. Thus, if the Bank of England rate is 0.25 per cent, your interest rate is 2.25 per cent. If the base rate were to rise by half a percentage point, your tracker would rise to 2.75 per cent.

A tracker mortgage therefore differs from a fixed rate mortgage, where you pay the same every month for the duration of the mortgage deal. However it is usually cheaper than an SVR mortgage, and more predictable, since the SVR interest rates can change at the whim of the lender.

Like fixed-rate deals, most tracker deals last for between two and four years, though it is possible to get a ‘lifetime tracker’ which lasts for the entire length of your mortgage. However this is a risk, because even if interest rates have been low for a long time, you cannot guarantee how much longer they will stay low.

How often will my monthly payments change?

Your mortgage repayments can in theory change each month, but this would be rare. For example, the Bank of England has only changed its rate a few times since 2015. However, in the past base rates have been known to change more regularly.

It isn’t guaranteed that your rate will always drop if the reference base rate falls. That’s because some tracker mortgages have an interest rate collar (sometimes called a floor), which is a minimum rate it can reduce to. For example, if your deal has a collar of 0.7 per cent and the base rate has dropped to 0.3 per cent, your tracker’s rate would still be set as if the base rate were  0.7 per cent (e.g. 2.7 per cent). Beware of tracker deals where the collar is set at the initial rate you pay, as this means you can never benefit if the base rate falls. Look for tracker deals that can fall as well as rise.

You might also be able to find deals with a cap on the maximum the interest rate could rise to. The cap is usually in place for a set period. These deals are rarer, but a mortgage broker can help you find one.

What are the benefits of a tracker mortgage?

  • When interest rates are low, a tracker can be cheaper than fixed rate deals
  • Your interest rate may also fall further (unless your collar doesn’t allow this)
  • Trackers often have shorter tie-in periods, making it easier to remortgage if you want to switch quickly.

What are the downsides of a tracker mortgage?

  • If base rates increase, your rate will too, so your monthly repayments will rise
  • If your deal has a collar which is set at your initial interest rate, you won’t benefit from base rate decreases.
  • If you can find a deal with a cap on maximum interest rates, the initial rate may be high.

As with all deals, you may have to pay early repayment charges (ERC) if you overpay, repay early or switch before your tie-in period ends. These fees can be steep, so check the terms of the mortgage carefully.

Who typically gets a tracker mortgage?

If you’re a first-time buyer, a tracker mortgage could be a good option if rates are low, but it might be wise to find a deal with a cap if you’re not sure you could make higher payments should the rates increase.

Buy-to-let mortgages are typically more expensive, so choosing a tracker deal could help you take advantage of low interest rates to keep your payments down.

The UK’s base interest rates have been at record lows for some time, but at times when they are higher, tracker mortgages can be more attractive. This is because rate cuts become more likely, so you may stand to benefit from lower rates (unlike those who would be stuck on fixed rates).

How can I get the best tracker deal?

The first question to ask is which type of mortgage deal is right for you. Don’t assume that a tracker or a fixed rate is right for you before talking with a mortgage broker. Your broker can give you a fully unbiased view based on their expert knowledge of all the products currently available.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.