What is a tracker mortgage and how do they work?

In this guide:

What is a tracker mortgage?

 A tracker mortgage is a type of variable mortgage that follows an external interest rate –typically the Bank of England base rate, plus a set margin. This means that when the base rate rises, your monthly payments will increase, and when it falls, they will reduce.

How do tracker mortgages work?


Tracker mortgages are variable rate mortgages, which means your monthly payments can go up or down in line with any changes in the Bank of England base rate. 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 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 (ERCs) may apply.

You can use our mortgage interest rate calculator to find out how a rate change would affect your monthly payments.

How long do tracker mortgages last?


You can choose how long you want your tracker mortgage deal to last, with terms typically ranging from 2 or 3 years right up to the full length of the mortgage term. When your deal finishes, you’ll usually automatically move onto your lender’s standard variable rate (SVR) unless you choose to remortgage to another tracker mortgage, or another type of mortgage deal.

What is an interest rate collar?


Some tracker deals have a ‘floor’ which they won’t go below, known as an interest rate collar. This means your payments may not drop below a certain level, even if the Bank of England cuts the base rate so that it is lower than this collar.⁠


What is a lifetime tracker mortgage?


Lifetime tracker mortgages track an external interest rate, typically the Bank of England 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 (SVR).

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 term 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 (ERCs) to pay if you decide to switch away from your lifetime tracker before your mortgage finishes.

What is a Buy to Let tracker mortgage?


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 this type of deal is right for you, seek professional advice before proceeding.⁠

What is the difference between a tracker mortgage and a variable mortgage?

The rate on a standard variable rate (SVR) mortgage is determined by the lender who can change it as and when they choose, whereas the rate on a tracker mortgage moves up and down in line with an external rate such as the Bank of England base rate.

You will usually move onto your lender’s SVR once your mortgage deal finishes. Learn more about variable mortgages in our guide ‘What is a variable rate mortgage?’

Should I choose a fixed or tracker rate mortgage?

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 can 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.

However 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.

Find out more about how fixed rate mortgages work in our 'Guide to fixed rate mortgages'.

Can I switch from a fixed rate to a tracker rate mortgage?


You can switch from a fixed rate mortgage to a tracker deal, but there will often be Early Repayment Charges (ERCs) to pay if you want to leave your fixed deal before it finishes.

These can often be high and may outweigh any financial benefit you stand to make from switching, so it’s worth seeking expert advice before you move your mortgage, so it’s important to do your sums.

Our calculator can help you to compare deals. Find out more about comparing two mortgage rates

What are the advantages of a tracker mortgage?

Tracker mortgages have several advantages.

These include:

  • Introductory tracker rates are currently very competitive and may be lower than other mortgage deals
  • The Bank of England base rate has been exceptionally low for several years, making this mortgage type a good option for borrowers wanting affordable repayments, although there are no guarantees it will remain low in future
  • Your payments won’t go up by more than any increase in the Bank of England base rate during the tracker period
  • If the base rate falls, your monthly mortgage payments will become cheaper
  • This may enable you to make overpayments so that you can reduce the amount of interest you pay overall.


What are the disadvantages of a tracker mortgage?

  • Tracker rates are variable, which means your payments can go up as well as down, and could leave you stretched financially if you’re on a tight budget
  • There’s usually no limit on how much your rate can go up by
  • If you do find a tracker mortgage which caps the rate you pay at a certain limit, you’ll usually pay a higher rate for this peace of mind
  • If your deal has a collar, your rate won’t fall below this, meaning you won’t benefit from any further cuts in the Bank of England base rate once the collar is reached
  • If you want to leave your mortgage early, perhaps because you want to pay off your mortgage or remortgage to a different deal, you may have to pay steep Early Repayment Charges (ERCs)


What happens when your tracker mortgage ends?

You’ll usually move onto your lender’s standard variable rate (SVR) when your tracker mortgage ends. The standard variable rate is generally higher than other mortgage rates, so you may want to consider remortgaging when your deal finishes, either to another tracker mortgage or another type of mortgage, such as a fixed rate deal.

Is a tracker mortgage right for you?

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.

Contact L&C today for fee free advice on the mortgages or visit our dedicated tracker mortgage page to find out more.
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