A Guide To Tracker Mortgages

Written by Jason Bailey on February 4, 2019

Updated April 12, 2022

Woman searching for mortgages

For home buyers who want their mortgages to reflect the base rate changes, perhaps tracker mortgages can really help. Tracker mortgage refers to variable rate types of mortgages where interest rate payments are controlled by the base rate changes of the Bank of England. Base rate refers to the price banks incur in ‘purchasing’ money.

Depending on the performance of the economy, the Bank of England can make the cost very expensive or affordable. Note that tracker mortgage rates are the ones that track the base rate and not the lender determining the rate as happens in other mortgages such as the standard variable rate ones.

The monthly payment is usually very appealing to property buyers under tracker mortgages, particularly when the economy isn’t doing well as the repayments are usually very affordable.

Tracker mortgage simplified

Tracker mortgage rates are not hard to grasp. It actually refers to the base rate and an indicated fee on top that you must agree to for a specific period of time. If you’re partaking a mortgage with tracker mortgage being Base Rate +3 and the Bank of England puts the Base Rate at 1%, you’ll be paying 4%. In case the base rate goes up to 4%, the amount you’ll be paying is 7%.

Know whether your tracker mortgage is capped. Capping means your mortgage rate amount cannot exceed a specific level no matter the changes with the base rate.

Tracker mortgages and external factors

While the base rate influences the cost of tracker mortgages, external factors are associated with them for a specific agreed period such as three or five years. It means that where tracker mortgages have a longer shelf life, the interest rate will be higher. Shorter mortgage tracker periods attract less favourable rates. Remember that they’re actually variable-rate mortgages and the repayment amount every month won’t always be the same.

You can actually access a lifetime tracker that keeps tracking the external factor for the duration of the mortgage or loan to help keep the rates low.

Interest and capital

With tracker mortgages note that the amount you repay will cater for the interest rate while the other part will be repaying the borrowed amount. If monthly payments go up due to an increase in the base rate due to a decision by the Bank of England the additional funds will be servicing the increased interest rate and not the borrowed amount. It means while you might not be paying extra every month, you also not paying more of your borrowed mortgage amount.

While shopping for tracker mortgages pay attention to floor or collar ones (mean they’ve minimum interest rate) and no matter how the base rate goes down the interest rate hardly change. Collar or floor is the opposite of capping where a rise in base rate won’t affect your interest rate.

Introductory term

In most cases tracker mortgages are for an introductory term; they’re usually the most affordable mortgage interest rates in the market at any given time. Tracker rates in most cases don’t go beyond five years and begin from two years. Short term ones usually come with lots of incentives and the shorter the term of the tracker mortgage the more the chances of actually enjoying lower interest rate.

Pay attention to the tracker mortgage after the introductory term has ended since the tracker rate might go on the lenders standard variable rate and monthly repayments could rise depending on the base rate of the day.

Lifetime types

As a mortgage consumer, you might not want to worry about the introductory term ending and reverting to another costly mortgage arrangement, especially if the interest rates are affordable and you’re completely happy with them. In such a case, lifetime tracker mortgages can work really well. They’re low and will last until the mortgage is completely serviced.

At the beginning of the repayment period, they might appear expensive but won’t require extra mortgage charges or any troubling re-mortgaging.

Weigh the options of a lifetime tracker mortgage if available over an introductory term only arrangement that could mean expensive interest rates once the term has ended and the mortgage repayment has to continue.

Check the best tracker mortgage deals

The benefits of tracker mortgages are a number, especially the fact that you enjoy low-interest rates and early loan repayments are less expensive. Even so, you might want to take some time to search for the best tracker mortgages around.

Compare different lenders and see what they offer both on introductory term only and lifetime tracker mortgage arrangements.

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