A tracker mortgage is one in which the interest rate charged by a mortgage lender fluctuates in relation to the Bank of England Base Rate, at an agreed, fixed percentage above, or below – although usually above – that rate. Any change in the base rate will be reflected in correspondingly higher, or lower, monthly repayments, usually commencing with the repayment immediately following the rate change. The initial interest rate of a tracker mortgage is, typically, more competitive than, say, a capped, or fixed rate, mortgage, but this type of mortgage does not offer a borrower any protection against a rise in interest rates.
Tracker Mortgage Benefits
Interest rates on variable, or discounted, rate mortgages are determined by the “Standard Variable Rate”, or “SVR” of the specific lender concerned, which may, or may not, reflect changes in the Bank of England Base Rate. Although a change in the base rate is likely to result in a change, sooner or later, in the SVR, the two are not inextricably linked, and while a rise in interest rates may be passed on, very quickly, and in full, to borrowers, the same is not true of a fall in interest rates. Mortgage lenders, may choose, at their discretion, for example, not to pass on some, or all, of the benefits of a base rate cut.
A tracker mortgage, on the other hand, offers the certainty that a cut in the base rate will be reflected fairly quickly – subject to certain terms and conditions – in the interest rate charged by a lender.
A mortgage lender must adjust the rate in line with the rate being tracked, although some lenders do reserve the right to delay any adjustment, by, perhaps, up to 30 days. Many borrowers feel more comfortable in linking to the Bank of England Base Rate, as this is a reflection of the current economic health of the nation, and adds credibility to the rate of interest which they are required to pay.
Mortgage lenders often offer tracker mortgages at an initial, “incentive” rate – lower than that for a fixed rate mortgages, over the same period – and may include other flexible features, such as options for under, or overpayment, payment “holidays”, or “cash back” on completion of a mortgage. It may also be possible to switch to a fixed rate mortgage, with the same lender, before the end of the tracker rate period, without incurring any early redemption penalty.
Tracker rate mortgages are also widely available, from a variety of different lenders, so borrowers who have a preferred lender, or prefer to deal with well-known, “high street” lenders, should have no difficulty in finding a suitable mortgage offer.
We Search Over 33,000 Mortgages / Remortgages for You
Tracker Mortgage Drawbacks
On the downside, an arrangement, or booking, fee is usually payable for a tracker rate mortgage, and early redemption penalties are likely to apply for, at least – and often beyond – the length of the tracker rate period.
In addition, if interest rates – and, therefore, your monthly repayments – rise, there is no maximum limit imposed, so repayments could potentially spiral upwardly, out of control. Indeed, some tracker rate mortgages, while offering no protection against soaring interest rates, do also limit the potential benefits of an interest rate cut, by imposing a minimum level, or “collar”, beyond which the interest rate cannot fall.
Furthermore, some lenders include terms and conditions that allow them, under certain circumstances – for example, if interest rates plummet – to review, and adjust, the percentage margin between the tracker rate and the base rate. This effectively defeats the object of a tracker rate mortgage, in the first place, so make sure that you are aware of all the terms and conditions – including, additionally, any compulsory insurance policies, for example – of a mortgage deal, before you complete your application.
Other Tracker Mortgage Considerations
Tracker mortgages are generally available in two forms – a short-term tracker, which tracks the base rate for a fixed period – typically, two, or three, years – before moving to the SVR of the lender in question, and a long-term, or “lifetime”, tracker, which tracks the base rate for the entire term of the mortgage – perhaps, up to 25 years. As a general rule, however, the shorter the term of a tracker mortgage, the more competitive the interest rate on offer.
Lenders often use “discounted” tracker rates – with an extra percentage discounted from the standard tracker rate, for a limited time period – to attract first time buyers. Bear in mind, however, that an unexpected increase in the base rate may negate the benefits of any such discount.
A tracker mortgage may not, necessarily, suit all borrowers. Tracker mortgages do include an element of risk, insofar as, although initial repayments may be less expensive than those for alternative mortgage products, repayments may also rise substantially in the future. Borrowers for whom mortgage repayments represent a substantial portion of monthly income, for example, may prefer the definite guarantees of a fixed rate, or capped, mortgage.
As with any mortgage, or other financial, product, if you are in any doubt as to whether a tracker rate mortgage is suitable for your own, individual circumstances, you should consider consulting a properly qualified Independent Financial Advisor (IFA), for expert, impartial advice. A reputable IFA will not only be able to assess your suitability for a tracker rate mortgage, in the first instance, but also to assist you in selecting, and monitoring, an appropriate mortgage product, and the market, subsequently.
If you would like one of Global Financial Limited's independent mortgage brokers to supply you with a no obligation quotation then simply fill in the form and a broker will phone you to discuss the finer points as you would not want to sign up to a mortgage that is not quite what you wanted.
