What is a tracker mortgage?
Michael from Warwick
05 May 2015
Finance questions and answers
I’ve never owned a property before so I’m completely new to this, but what is a tracker mortgage? I’ve always assumed that mortgages work by paying off a set amount each month for a set amount of time, but a tracker mortgage seems different. How do tracker mortgages work?
Mortgage deals tend to split down into two very basic types of deal, fixed or variable. Fixed rates do exactly as the name suggests and the interest rate that you are charged will not change for a specified period of time no matter what happens with interest rates.
Current options allow borrowers to fix their mortgage rate for anything from two through to ten years depending on what deal they plump for.
Unlike fixed deals, variable rates can fluctuate even during the incentive period of the deal. Variable deals tend to either be linked to a lenders standard variable rate (SVR) or to the Bank of England Base Rate.
The former are often referred to as discounted deals and the interest rate charged will vary depending on movement in the SVR. That might be because of a change in the Bank of England Base Rate but not necessarily and lenders can change it at their discretion.
Tracker rates are directly pegged to the Bank of England Base Rate so the borrower knows that the rate they are charged will move up and down in line with any Base Rate change. Therefore, although the rate may increase, you know it won’t be by more than the Base Rate has moved.
The usual dilemma for borrowers in deciding whether a tracker might be best is that variable rates are often lower than fixed rates. In addition there could be the chance of interest rates coming down.
In the current climate fixed rates are extremely close to those offered on tracker deals and Base Rate is at a record low. As a result many are electing to lock into a fixed rate to guard against rising monthly payments if interest rates climb.
That could take time, so tracker rates can work for those that have enough slack in their monthly budget to absorb rising costs. If you are unsure you can use our calculator to see how a rise in interest rates would affect your monthly payment.
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