Tracker mortgages guide
What is a tracker mortgage?
A tracker mortgage mirrors the Bank of England Base Rate, plus a set margin above or below it.
Tracker mortgages are variable rate mortgages, which means your monthly payments can go up or down if the Bank of England base rate rises or falls. Tracker mortgage rates usually change the month after any change in the Base Rate.
They should not be confused with discounted mortgages, which are also variable rate deals, but which follow the lender’s standard variable rate at a set margin below it.
The Bank of England Base Rate is currently very low, which means many people with tracker mortgages are enjoying a period of very low interest rates, and there are some great tracker mortgage deals available.
If you are considering a tracker mortgage, you must be prepared to accept that your monthly mortgage payments could increase if the Bank of England chooses to raise the Base Rate. If you need greater budgeting certainty, you may prefer a fixed rate mortgage, which guarantees your payments will remain the same for a set period of time.
No-one knows when the Bank of England will raise the Base Rate, so it’s important to ensure you are prepared for higher payments at any time.
Bear in mind that when the Base Rate falls, some tracker deals have a ‘floor’ which they won’t go below, and as a result your payments may not drop below a certain level. Remember too that if you want to pay off your mortgage early, or switch to a different deal during the tracker period, early repayment charges may apply.
Lifetime tracker mortgages
Lifetime tracker mortgages are linked to the Base Rate for the lifetime of the loan.
Other tracker mortgages which aren’t lifetime deals are typically linked to the Base Rate for a set number of years. After that they revert to the lender’s standard variable rate.
The main benefit of a lifetime tracker mortgage is that you don’t have to worry that your deal will end soon, as it will last for the full term of the mortgage.
Lifetime tracker mortgage rates are usually a bit higher than shorter tracker deals. However, this type of deal can sometimes be more cost-effective over the long term as you don’t have to keep remortgaging when your deal ends and can avoid further mortgage arrangement fees and other associated costs.
There may be early repayment charges to pay if you decide to switch away from your lifetime tracker before your mortgage finishes.
Best tracker mortgages
The best tracker mortgage for you will depend on your individual circumstances and how long you want to be tied into a particular deal.
For example, if you think the Bank of England is likely to raise the Base Rate soon, you may only want a short-term tracker deal lasting a couple of years. If, however, you believe the Base Rate will remain low for many years to come, you may be comfortable signing up to a long-term or lifetime mortgage deal.
The best tracker mortgages aren’t necessarily always the ones which are closest to the Bank of England Base Rate. As well as looking at the headline rate, you should always factor in other costs too, such as mortgage arrangement fees, as these can bump up the cost of any deal.
Seek professional advice from one of our brokers if you’re unsure which is the best tracker mortgage deal for you.
Fixed or tracker mortgages?
The key difference between a fixed rate mortgage and a tracker rate mortgage is that with a fixed deal your monthly payments won’t change, but with a tracker deal they could go up or down.
Tracker mortgage rates are variable, so your monthly payments will rise if the Bank of England increases the Base Rate, and they will fall when the Bank lowers the Base Rate.
With a fixed rate mortgage, your rate is fixed for the term of the deal, so your monthly payments will remain the same regardless of what happens to the Base Rate. You may pay a slightly higher rate for a fixed rate mortgage than a tracker deal for the certainty this provides.
If the Bank of England keeps the base rate low during the term of your deal, however, you may benefit from lower payments than you might have paid with a fixed rate mortgage.
But if the Base Rate rises during the term of your tracker mortgage, your payments may be higher than they would have been if you’d chosen a fixed deal.
Contact L&C today for advice on the best tracker and fixed rate mortgage deals so you can decide which is the best option for you.
Buy to let tracker mortgages
Tracker mortgage deals are available to landlords as well as those looking for residential mortgages.
Landlords considering this type of buy to let mortgage deal must be prepared for the fact that their mortgage payments could rise if the Bank of England raises the Base Rate. Any rental income should therefore be enough to cover any potential increase in payments.
If you’re uncertain whether a buy to let tracker mortgage deal is right for you, seek professional advice before proceeding.