What is a tracker mortgage rate?
A tracker mortgage is a mortgage where the interest rate 'tracks' an external benchmark, usually the Bank of England base rate.
The rate you pay is made up of:
- The base rate
- A fixed percentage added by your bank or building society (AKA lender), known as the margin
For example:
- Base rate: 4.50%
- Lender margin: +1.00%
Your tracker mortgage rate would be 5.50%.
A tracker mortgage can become cheaper when interest rates fall, but it can also become more expensive when rates rise.
In the real world, this means that if the base rate rises by 0.25%, your mortgage rate will go up by the same amount. If the base rate falls by 0.25%, your mortgage rate will go down by 0.25% as well.
How do tracker mortgages work?
Tracker mortgages are offered for a set period, normally two, three or five years. Some lenders might offer lifetime tracker mortgages that last for the whole of your mortgage term.
During the tracker period, your mortgage’s interest rate mirrors the rate it tracks.
If the Bank of England announces a base rate increase:
- Your mortgage rate will usually go up
- Your mortgage repayments will be more each month
- These higher monthly payments will begin the following month
If the base rate falls:
- Your mortgage rate will usually go down
- Your monthly repayments may become cheaper
- You could pay less interest over time
When your tracker deal ends, you'll normally move onto your lender's standard variable rate (SVR) unless you switch to a new mortgage deal. The SVR is often higher than introductory rates, so many borrowers review their options before their deal finishes.
Here's an example
Imagine you've borrowed £250,000 over 25 years, based on a repayment mortgage.
If your tracker rate increased from 5% to 6%, your monthly payments could increase by £150. Equally, if rates fell, your monthly payments could reduce.
That's why you should also think about what you might be able to afford as time goes by, as well as what you can afford today.
Key tracker mortgage terms explained
Understanding a few common mortgage terms can make it easier to compare deals.
Base rate
The Bank of England base rate is the interest rate set by the Bank of England.
It influences borrowing costs across the UK and is the benchmark used by most tracker mortgages. Tracker mortgages follow this rate directly. When it changes, your mortgage rate will normally change too.
Margin
The margin is an extra bit of interest added to the base rate.
For example:
- Base rate: 4.50%
- Margin: +1.00
- Mortgage rate: 5.50%
Even if the base rate changes, the margin won’t. It will stay the same throughout the tracker period.
Standard variable rate (SVR)
The SVR is your lender's default mortgage rate. It is generally higher than specific mortgage deals.
You can stop yourself going onto your lender’s SVR by starting the remortgage process 4 – 6 months before your current mortgage deal ends. This could save you a good deal of money.
Interest rate collar
A collar, sometimes called a floor, sets the lowest rate your mortgage can fall to.
This means your payments may not reduce beyond a certain point, even if interest rates continue to fall.
Interest rate cap
A cap limits how high your mortgage rate can go up to.
Very few tracker mortgages have a cap, but those that do can give you peace of mind if interest rates rocket upward.
Early repayment charge (ERC)
An ERC is a fee you may have to pay if you:
- Leave your mortgage deal early
- Remortgage before the deal ends
- Repay a large amount of your mortgage during the deal period
Many, but not all, mortgage deals come with an ERC. You should always check whether a mortgage deal has an ERC before you apply.
Tracker mortgage vs fixed rate mortgage
One of the biggest decisions you’ll face is whether to choose a tracker mortgage or a fixed rate mortgage.
Both have advantages and drawbacks.
- A fixed rate mortgage keeps your payments the same during the deal period
- A tracker mortgage allows your payments to move up and down with interest rates
Why borrowers choose tracker mortgages
- Rates can be competitive
- You benefit if interest rates fall
- Rate changes are linked to a clear benchmark
- Some deals offer greater flexibility
Why borrowers choose fixed rate mortgages
- Payments stay the same
- Budgeting is easier
- You're protected if interest rates increase
- It provides greater certainty
Which option is better?
There isn't a single right answer
If predictable monthly payments are your priority, a fixed rate mortgage may be more suitable.
If you're comfortable with some uncertainty and want to benefit if rates fall, a tracker mortgage could be worth considering.
Tracker mortgage vs other variable rate mortgages
Variable rate mortgages don't all work in the same way.
Understanding the differences can help you make a more informed decision.
Tracker mortgage vs discounted mortgage
A discounted mortgage offers a discount off your lender's standard variable rate (SVR).
A tracker mortgage follows an external benchmark, usually the Bank of England base rate.
Because the lender controls its SVR, discounted mortgage rates can be harder to predict. Tracker mortgages tend to be more transparent because they follow a publicly available benchmark.
Tracker mortgage vs SVR
A tracker mortgage and an SVR mortgage are different products.
With an SVR:
- The lender decides when rates change
- The lender decides by how much rates change
With a tracker mortgage:
- The rate follows an agreed benchmark
- Changes are generally more transparent
- You’ll know how future rate movements will affect your mortgage
This transparency is one of the reasons tracker mortgages could work for you if you’re happy with changing payments.
Is a tracker mortgage right for you?
Tracker mortgages can work particularly well in some situations, but not all.
A tracker mortgage might be right if:
- You have room in your budget for payment increases
- You're comfortable with changing monthly payments
- You think interest rates could fall
- You want to benefit from future rate reductions automatically
A tracker mortgage might not be for you if:
- You need certainty over your monthly costs
- You're borrowing close to your affordability limit
- You would struggle if payments increased
- You prefer a predictable budget
Before choosing any mortgage, think carefully about how you’d cope if rates went up by 1% or 2%.
A mortgage shouldn't just be affordable today. It should remain affordable if circumstances change.
Types of tracker mortgages
Tracker mortgages are available in several different forms.
Two-year tracker mortgages
These could be for you if you want flexibility and think you might look at your mortgage again in the near future.
Five-year tracker mortgages
These reduce the need to remortgage after just a couple of years.
Lifetime tracker mortgages
A lifetime tracker mortgage follows the chosen benchmark rate for the entire mortgage term.
Some borrowers like the simplicity of knowing they won't need to switch deals every few years.
Buy-to-let tracker mortgages
Landlords can also get tracker mortgages.
Before choosing a buy-to-let tracker mortgage, it's important to consider whether your rental income could still cover repayments if interest rates rise.
Who can get a tracker mortgage?
Tracker mortgages are available to many different types of borrowers, including first time buyers, home movers and people looking to remortgage.
Lenders will normally assess:
- Your income
- Employment status
- Credit history
- Existing commitments
- Deposit or available equity
First time buyers
Many first time buyers can get a tracker mortgage, although a fixed rate mortgage might suit first time buyers whop are looking for more certainty.
Home movers
Moving home is a good time to review different mortgage options, including tracker products.
Remortgage customers
Borrowers coming to the end of an existing deal may choose a tracker mortgage if they want flexibility and the chance to benefit if rates drop in the future.
Self-employed applicants
Self-employed borrowers can apply for tracker mortgages too. But as with all self-employed mortgage applications, lenders might ask for more evidence of your income.
L&C expert view
The lowest rate isn’t always the best deal.
When comparing tracker mortgages, it's important to consider the full cost of borrowing, including:
- Product fees
- Cashback offers
- Early repayment charges
- Overpayment flexibility
- The overall cost over the deal period
It's also worth thinking about how future interest rate changes could affect your monthly budget.
An experienced mortgage adviser can help you compare different mortgage types and understand which option is likely to be most suitable for your circumstances.
Other people ask
Are tracker mortgages a good idea?
They can be a good option if you’re comfortable with fluctuating repayments and want to benefit if interest rates fall.
Are tracker mortgages cheaper than fixed rate mortgages?
Sometimes. The answer depends on interest rate movements during the deal period and the fees attached to each mortgage product.
Can tracker mortgage rates go down?
Yes. If the tracked benchmark rate falls, your mortgage rate will usually go down as well.
Can tracker mortgage rates go up?
Yes. If the benchmark rate rises, your mortgage payments will normally go up.
Can first-time buyers get tracker mortgages?
Yes. Many lenders offer tracker mortgages to eligible first-time buyers, subject to affordability checks and lending criteria.
Can I overpay a tracker mortgage?
Often yes, although individual lender rules vary and some deals place limits on how much you can overpay each year.
What happens when a tracker mortgage ends?
Most borrowers move onto their lender's standard variable rate unless they switch to a new mortgage deal.
Can I switch from a tracker mortgage to a fixed rate?
Yes. However, check whether early repayment charges apply before making the switch.
Should I remortgage before my tracker ends?
Many borrowers review their options several months before their deal expires to avoid moving onto a potentially higher SVR.
Find the right tracker mortgage for you
Whether you're buying your first home, moving house, investing in property or remortgaging, choosing the right tracker mortgage can save you money and help you stay in control of your borrowing costs.
At L&C, our advisers can compare deals from a wide range of lenders, explain the pros and cons of different mortgage types, and help you understand how future interest-rate changes could affect your repayments.
Ready to get started?
- Compare tracker mortgage deals
- Check how much you could borrow
- Start your application online today
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