what is a tracker mortgage?

A tracker mortgage is a type of variable-rate mortgage where the interest rate you pay is directly linked to an external rate, typically the Bank of England’s base rate. This means that your mortgage payments can go up or down in line with changes to the base rate. Here’s a comprehensive look at tracker mortgages:

Key Features of a Tracker Mortgage

Interest Rate Linkage

• • Base Rate Tracking: The interest rate on a tracker mortgage follows the Bank of England base rate plus a set percentage. For example, if the base rate is 0.5% and your tracker mortgage is set at base rate + 1%, your mortgage rate would be 1.5%.
  • Variable Payments: As the base rate changes, your monthly mortgage payments will adjust accordingly.

No Fixed Rate

• • Variable Nature: Unlike fixed-rate mortgages, tracker mortgages do not have a fixed interest rate. This means your payments can fluctuate throughout the term of the mortgage.

Initial Period and Lifetime Trackers

• • Initial Period Trackers: These have a tracking rate for a set period, usually 2, 3, or 5 years, after which they often revert to the lender’s standard variable rate (SVR).
  • Lifetime Trackers: These track the base rate for the entire term of the mortgage.

Capped and Uncapped Trackers

• • Capped Trackers: These have an upper limit on how high the interest rate can go, providing some protection against significant rate increases.
  • Uncapped Trackers: These do not have an upper limit, so your interest rate can increase without restriction, depending on base rate changes.

Benefits of a Tracker Mortgage

Potential for Lower Payments

• • Falling Rates: If the base rate decreases, your mortgage payments will also decrease, potentially saving you money.

Transparency

• • Clear Link to Base Rate: The direct linkage to the base rate provides transparency on how your interest rate is determined, without hidden charges or arbitrary changes.

No Early Repayment Charges

• • Flexibility: Some tracker mortgages come with no early repayment charges, offering flexibility if you want to pay off your mortgage early or switch to a different product.

Considerations and Risks

Payment Uncertainty

• • Rising Rates: If the base rate increases, your mortgage payments will rise, which can lead to higher monthly outgoings and impact your budget.

Lender’s SVR

• • Reversion to SVR: After the initial tracking period, your mortgage may revert to the lender’s standard variable rate, which can be higher than the base rate plus margin.

Economic Factors

• • Market Conditions: Economic factors influencing the base rate can impact your payments. Understanding the economic outlook can help you anticipate possible changes.

Example Scenario

Suppose you have a tracker mortgage with an interest rate set at base rate + 1%. If the current Bank of England base rate is 0.75%, your mortgage rate would be: 0.75%+1%=1.75%0.75\% + 1\% = 1.75\%0.75%+1%=1.75% If the base rate increases to 1.25%, your new mortgage rate would be: 1.25%+1%=2.25%1.25\% + 1\% = 2.25\%1.25%+1%=2.25% Your monthly payments would adjust accordingly based on this new rate.

Conclusion

A tracker mortgage can offer potential savings if interest rates remain low or decrease, but it also carries the risk of increased payments if rates rise. It provides transparency and flexibility, but you should carefully consider your ability to manage potential rate fluctuations. Consulting with a mortgage adviser can help determine if a tracker mortgage aligns with your financial situation and goals.