A tracker mortgage is a type of variable mortgage. The interest follows or “follows” another interest rate – usually the Bank of England base rate. And it’s almost always set to percent above the rate it is tracking.

How does a tracker mortgage work?

With a tracker mortgage, your monthly payments increase as the base rate increases. When it falls, your payments get cheaper.

For example, let’s say the interest rate on a tracker mortgage is the Bank of England base rate plus 0.8%. With a base rate of 1%, you would pay 1.8%. If the base rate climbed to 2%, you would be paying 2.8%.

But if the Bank of England cuts the key rate to 0.5%, you’ll pay 1.3%.

If the interest rate on your tracker mortgage changes, your lender will write to you and let you know the new interest rate and your new monthly payment.

What is the Bank of England’s base rate?

This is the interest rate the Bank of England charges other banks and other lenders when they borrow money. It is sometimes abbreviated to BEBR.

The base price (June 2021) is currently at a record low of 0.1% after cuts were made at the start of the coronavirus pandemic in March 2020.

The Bank of England’s Monetary Policy Committee (MPC) meets roughly every six weeks to vote on whether to raise, lower, or stay the base rate. Occasionally, she holds emergency meetings to adjust the base rate.

Do trackers always track the base rate?

The majority of tracker mortgages follow the Bank of England base rate.

There are a few exceptions, however. Some tracker mortgages follow the London Inter-Bank Offered Rate (Libor). The Libor is the interest rate banks use to lend each other money. Tracking the Libor is more common with mortgages to buy for rent than home loans.

However, the Libor is expected to expire in 2021, so these deals will disappear.

You should also be on the lookout for lenders offering mortgage products that are at the lender’s own “base rate” rather than the Bank of England’s. While these rates are likely to be very similar to the Bank of England base rate, it is not guaranteed.

What’s the difference between a tracker and a standard adjustable rate mortgage?

Each mortgage lender has their own Standard Variable Rate (SVR). The lender can change this rate at any time, although most of the changes will correspond to the Bank of England base rate.

Some banks offer SVR mortgages, but this rate is more commonly used as the entry rate at the end of a fixed, tracker, or discount deal. SVRs are usually higher than the base rate.

Tracker mortgages are tied to an external rate rather than the SVR set by the lender.

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

On a discount mortgage, the interest rate payable is a set amount below the lender’s SVR.

For example, if the lender’s SVR is 2% and the discount is 0.5%, you will pay 1.5%.

The main difference between a tracker and a discount mortgage is that the tracker’s interest rate is pegged to an external rate (usually the Bank of England base rate), while the interest rate on a discount mortgage is pegged to the lender’s SVR.

What is a tracker collar?

Some tracker mortgages have a “collar” or “floor” interest rate. They both mean the same thing – it’s the lowest interest rate you’ll pay on your mortgage. This means that your interest rate will not go below a certain level, even if the base rate does so.

For example, let’s say you have a tracker with a base rate payout rate plus 0.8% and a 1% collar. If the base rate drops to 0.1%, you are still paying 1% interest on your mortgage.

Not all tracker mortgages are collared, and those that do are likely to get buried in the fine print.

What is a tracker cap?

A cap is the opposite of a collar – it’s the highest interest rate you’ll ever pay on your tracker mortgage.

For example, if your tracker mortgage has a 3% cap and the base rate is raised to 4%, you will still be paying 3% interest on your mortgage.

Caps usually last up to five years.

How long do tracker mortgages last?

Some tracker mortgage products have a term of two, three, five, or ten years. After that period, you’ll usually pay the lender’s standard floating rate (SVR) rate – which is often higher.

“Lifetime trackers” are valid for the entire term of the mortgage. Lifetime tracker products typically do not charge early repayment fees when planning to prepay your mortgage or reschedule.

Are there any fees for tracker mortgages?

Some tracker mortgages have an upfront fee, just as there is often a fee for fixed rate transactions.

These fees can vary between mortgage products and from lender to lender.

When should you choose a tracker mortgage?

You should choose a tracker mortgage if your monthly payment budget is slack and you think the Bank of England base rate will either stay the same or go down. When the base rate goes down, you pay less interest on your mortgage.

So the decision to get a tracker mortgage depends on what you think the base rate will do in the future. But that is very difficult to predict – even the experts are sometimes wrong.

You should only take out a tracker mortgage if you are sure that you can afford higher monthly payments when the Bank of England increases the base rate.

Benefits of Tracker Mortgages

• A good option if the base rate is low, and even better if it continues to fall

• Payments will not increase by more than an increase in the Bank of England Base Rate during the Tracker Period

• A cap tracker can provide assurance of the highest rate you will have to pay

• Most lifetime tracker mortgages have no prepayment penalties

• Some lifetime trackers allow unlimited overpayments.

Disadvantages of tracker mortgages

• The tracker rates are variable. So if the Bank of England base rate goes up, so will your monthly payments

• If there is no cap on your tracker, there is no limit to how much you can increase your salary

• Capsized tracker mortgages usually cost more

• If the tracker mortgage has a collar, you won’t benefit from a drop in the base rate above a certain level

• You may have to pay an early repayment fee if you need to end your tracker deal early.