Tracker Mortgages Explained

What is a tracker mortgage?

A tracker mortgage has a variable interest rate, which means that it can go up as well as down. The rate tracks an external rate, which is usually the Bank of England base rate. As such, we’ll refer to the base rate as the one being tracked for the rest of this guide. A set percentage is added to the base rate to determine the interest rate you have to pay.

As your interest rate tracks the base rate, this means that it will increase or decrease in line with each base rate change. The Monetary Policy Committee (MPC), which is a Bank of England committee, meets to discuss the base rate eight times each year. This helps you to know in advance when to expect a change in your interest rate. As well as that, you know exactly what your monthly payments will be each time the base rate changes.

You can choose to have a tracker mortgage deal for an introductory period, such as 2 to 5 years, or for your entire mortgage term, which is known as a lifetime tracker mortgage. For the latter option, just bear in mind that while you’ll benefit from lower payments when the base rate decreases, your monthly payments will get higher whenever the base rate increases. If the market turns for the worst during your mortgage term, you could end up paying a considerable amount of interest over that length of time. Also, interest rates tend to be higher for tracker mortgages applied over a long term rather than tracker mortgage deals with an introductory period.

How do tracker mortgages work?

As mentioned above, a tracker rate is more predictable than other types of variable rate mortgages. As it tracks the base rate, you know when your interest rate is likely to change and by how much. For example, your interest rate may be set at the base rate plus 1%. If the base rate is 5.25% at the start of your deal, this means that the interest rate you have to pay is 6.25%. If the base rate later increases to 5.5%, your interest rate will increase to 6.5%. On the other hand, if the base rate drops to 5%, your interest rate will decrease to 6%. When the base rate changes, your tracker rate will change fairly quickly, such as within 14 days or on the first day of the next month.

The percentage you’re charged on top of the base rate is set by your lender. Each lender differs with what their tracker rate is but it’s usually determined by their costs, market conditions and the terms of your mortgage. When you make your monthly mortgage payments, some of your money repays the loan while the rest pays the interest that’s due. If the base rate increases, causing your monthly payments to increase, you should be aware that the extra amount that you have to pay only covers the increased amount of interest. None of the extra money payable is used towards repaying the loan.

How often do tracker mortgage payment rates change?

A meeting is held eight times a year by the MPC to decide whether or not the base rate should change. In effect, this means that the base rate could alter eight times within a year, as it did in 2022, affecting your monthly payments. You need to be sure, therefore, that you can afford to maintain your monthly payments if the rate continues to increase after each meeting. When the base rate drops, you’ll benefit from lower monthly payments.

What are capped and collar rates?

Some lenders set a cap on your interest rate. This is the highest that your interest rate could rise to and is usually set for a specific period. Having a cap gives you peace of mind that your payments won’t go higher than a certain amount even if the base rate continues to increase. However, because of the security that this offers, lenders tend to charge a higher initial interest rate.

A collar, on the other hand, is a rate that your interest rate cannot fall below. Sometimes called a floor rate, this means that even if the base rate decreases below the collar rate, your interest rate won’t. It’s the minimum rate you have to pay and, as such, can restrict the amount you stand to save should the base rate continue to drop.

A capped rate protects you in times of economic instability when interest rates continue to rise. It ensures that your rate will never go above that level. A collar rate protects the lender to ensure that they won’t lose too much revenue in times when the base rate continually decreases.

Can you make overpayments on your tracker mortgage?

With a tracker mortgage, you can usually benefit from the flexibility of making overpayments. This reduces the amount you owe for your mortgage loan and, therefore, reduces the overall interest you are charged. You can usually make overpayments of up to 10% each year without incurring a penalty fee. However, be sure to check this with your lender first. Also, some deals have a tie-in period, which means that you’ll be liable for an early repayment charge (ERC) if you make an overpayment during that time.

Get expert advice on tracker mortgages

To discuss tracker mortgages in more detail, give our expert mortgage brokers a call on 01322 907 000. They’ll advise you on the rates available and help you to decide on the best tracker mortgage deal. This includes the length of the tracker term, the lender’s overpayment terms as well as any capped and collar rate options. When you’re ready to proceed, your dedicated mortgage broker will oversee the mortgage application process from start to finish. This ensures that you’ll benefit from a smooth transaction as your tracker mortgage deal is put in place.

At Trinity Finance, we can also help with other aspects related to your home purchase. For example, we can arrange your home insurance or mortgage payment protection insurance. Our mortgage and protection brokers can discuss these with you to help you decide on the right type of financial protection. If you’re unable to contact us by telephone, just send an email to us at info@trinityfinance.co.uk. Alternatively, send us an enquiry via our contact form. One of our mortgage consultants will reply to you as quickly as possible with further details of tracker mortgages and our other home-buying services.

What happens when your tracker mortgage deal ends?

When the introductory period for your tracker mortgage comes to an end, your rate automatically switches to your lender’s standard variable rate (SVR). SVRs are typically higher than other rates, which means that your monthly payments will likely increase. To avoid this, search for a new deal up to 6 months before your tracker mortgage deal ends. You can secure a new deal at this point to start when your tracker one finishes and, therefore, prevent your rate from switching to the SVR. A new deal can be found through your existing lender or you can remortgage with a new lender. You may decide to opt for a new tracker mortgage deal, try a different variable rate mortgage or choose a fixed rate mortgage.

Advantages of a tracker mortgage

There are many advantages to having a tracker mortgage:

• When the base rate (or other external rate that’s being tracked) decreases, so does your interest rate. This lowers your monthly payments and, when the base rate is low, can make a tracker mortgage deal a good option.
• Tracker mortgage deals can have lower interest rates than other types of deals.
• If your tracker mortgage deal has a capped rate, your interest rate won’t go higher than the cap, giving you peace of mind in times of economic uncertainty.
• Some lenders allow you to make overpayments without applying an early repayment charge (ERC). Having the flexibility to overpay reduces your outstanding mortgage loan and, subsequently, the overall interest payable.
• Not all tracker mortgages are subject to ERCs if you want to remortgage. This means that you can switch to a new deal if interest rates rise without being penalised.

Disadvantages of a tracker mortgage

There are also disadvantages to consider for tracker mortgages:

• As a variable rate mortgage, the rate you pay can increase or decrease in line with the base rate. This makes it hard to budget for your monthly payments. You may also end up paying a significant amount if the rate increases multiple times.
• If a collar rate has been set by the lender, your interest rate can’t fall below it, even if the base rate does. This restricts how much you can save on your monthly payments.
• Some lenders apply early repayment charges to tracker mortgage deals. This means that if you need to leave your deal early, you may end up paying a hefty fee.
• Tracker mortgage deals with a capped rate aren’t easy to find. Lenders who offer them charge a higher initial rate. This is because you benefit from the security of having a cap on the amount you may have to pay.
• When the introductory period ends, your rate will revert to the lender’s higher SVR unless you switch to a new deal.

How does a tracker mortgage compare with a fixed rate mortgage?

Tracker mortgages have variable rates. This means that your monthly payments can go up or down in line with the external rate that your tracker mortgage deal is following, such as the Bank of England base rate. If the base rate decreases, so does your interest rate and you benefit from lower payments. If the base rate increases, however, your interest rate and monthly payments also increase. Your payments could become very expensive if the rate continues to rise. You need to be sure that you can afford to maintain your monthly payments if this happens. If you don’t keep up with them, you risk your home being repossessed.

A fixed rate mortgage, on the other hand, has a fixed interest rate for the duration of the deal. This is usually 2, 3 or 5 years. A fixed rate helps you to budget for your mortgage payments as you pay the same amount each month. It also gives you peace of mind that you won’t have to pay any extra if the base rate increases. The downside is that you won’t benefit from lower payments if the base rate reduces. Lenders also tend to charge a higher rate for fixed rate mortgages than for tracker mortgages. This is because you benefit from the security of having a fixed rate for a set term. Also, early repayment charges usually apply to fixed rate mortgages whereas some lenders don’t attach these fees to tracker mortgages.

Is a tracker mortgage right for you?

If interest rates are low, a tracker mortgage can be a good option for keeping your monthly payments low. This can be useful if you’re a first-time buyer or don’t want to pay the higher fixed rates available. Likewise, if you think interest rates are going to drop, you’ll benefit from savings on your payments when that happens. Just remember that interest rates may increase and you’ll then need to make higher monthly payments. These may continue to increase and become very expensive unless you can secure a deal with a cap. If affordability is going to be an issue if rates climb too high, you may be better off with a fixed-rate deal. Also, if you prefer budgeting for your monthly payments and want the security of knowing exactly how much you have to pay, a fixed rate mortgage is going to be more suitable for you.

For more flexibility, a tracker mortgage is a better fit than other types, such as a fixed rate mortgage. Whilst lenders apply early repayment charges to fixed-rate deals, lenders don’t always penalise you with ERCs for tracker mortgages. This means that you can switch to a new deal with your existing lender, remortgage with a new lender or make overpayments without being charged a hefty fee.

Arrange a tracker mortgage to benefit from predictability and flexibility

It’s important to ensure that the mortgage product you choose is right for your circumstances and needs. Our mortgage brokers – located throughout Kent, London and Edinburgh – are available to discuss tracker mortgages in detail with you as well as the alternatives. That way, you can compare the pros and cons of each and make an informed decision before comparing different lenders’ terms if you decide that a tracker mortgage is right for you. To get started, just give our mortgage brokers a call on 01322 907 000. If it’s out of office hours, simply email us at info@trinityfinance.co.uk or send an enquiry via our contact form. One of our expert brokers will reply to you with more details as quickly as possible.

At Trinity Finance, we offer a diverse range of services as well as arranging mortgages. These include arranging buildings and contents insurance, putting financial protection in place in case of a serious injury, critical illness or work-related issue, arranging finance for refurbishment or development projects and providing estate planning advice. Get in touch with us to speak with one of our mortgage and protection brokers for peace of mind as you arrange financial protection for you, your property and your loved ones.