Tracker Rate Mortgage

Tracker rates are the most common form of variable rate mortgages and almost all mortgage lenders will offer a tracker rate of some form. Their popularity stems from the direct association with the Bank of England Base Rate allowing interest rate fluctuations to be passed directly to the tracker interest rate; an ideal product in a declining market.

What is a Tracker Rate Mortgage?

A tracker rate is a variable rate mortgage where the interest rate is linked directly to the Bank of England Base Rate and will track alongside that interest rate; hence the name 'tracker'. Whenever the Bank of England Base Rate changes, the rate on the tracker mortgage is guaranteed to change by the same amount, within an agreed period. The most common terms of tracker rates are 2, 3 and 5 years although longer terms are available as well. You may also find a 'tracker for life' or 'lifetime tracker' which is a tracker that will continue at that rate until the mortgage is repaid.

The Bank of England Base Rate is reviewed on a monthly basis (although this does not necessarily mean it will change). The advantage of a tracker rate mortgage is that it allows you to benefit from any interest rate decreases and so is an ideal product if you feel interest rates are due to fall.

Example of a tracker rate mortgage against the Bank of England base rate.

The major risk of tracker rates (and variable rates in general) is that your interest rate can also increase if Base Rate increases. There are ways to mitigate this risk such as by taking a capped rate (although the interest rate for capped rates are generally higher).

Typically, most trackers do not have an Early Repayment Charge [ERC] due to the variable nature, however, there are some that appear the the mortgage best buy tables that offer a lower rate of interest but contain an ERC. You should consider if you can still afford the mortgage payments if interest rates increase before committing to a tracker rate.

Advantages of Tracker Rate Mortgages

• If interest rates decrease, your interest rate will also decrease; ideal if you feel interest rates are going to fall
• By tracking the BoE Base Rate, your interest rate will immediately change after the Bank of England review
• Tracker rates are not dependant on the lenders financial position so your rate will change by the same amount that Base Rate changes. This is opposed to discounted rates which follow the lender's Standard Variable Rate where the lender may not necessarily change their rate at the same time or by the same margin

Disadvantages of Tracker Rate Mortgages

• The main disadvantage of tracker rates is that if the Bank of England increases Base Rate, your rate will also increase
• Unless you have a capped element to your tracker, there is in theory no limit to how high your rate can increase
• Some tracker rates contain Early Repayment Charges

Advice when choosing a Tracker rate mortgage

• Tracker rates are ideal in a declining market as it allows you to benefit from any interest rate drops, however, you must be aware that interest rates can also increase so you should ensure you can still afford the repayments if interest rates increase by a couple of percent
• Some tracker rates have an early repayment charge in exchange for a lower rate of interest. Ensure you know whether this applies to you and how much it would be if you wanted to exit the product early.
• It is also worth calculating at what rate the tracker increases to before it becomes more beneficial to pay the ERC to switch to a lower interest rate

Summary

• A tracker rate is one that follows the Bank of England Base Rate and is guaranteed to change by the same margin as Base Rate
• Typical terms of tracker mortgages include 2,3 and 5 years although longer periods are available and even 'lifetime trackers'
• Tracker rates are ideal if you feel interest rates are due to fall as your interest rate will also fall, however, the primary risk of tracker rates is that your rate will increase if Base Rate increases
• Some tracker rates contain an ERC in exchange for a lower interest rate. You should take caution if you feel interest rates could increase as you will be committed to paying this higher interest rate

For more information about 'Tracker Rate Mortgages', you can call us on 020 8783 1337 or submit an online quote.