We explain how tracker mortgages work and when they're likely to be a good option.
Tracker mortgages follow changes in the base rate, with a constant differential being maintained between the base rate and the mortgage interest rate.
A lender's standard variable rate will typically be around 1.5% above the base rate. In addition, a fall in the base rate will not always necessarily be followed by an equivalent fall in the standard variable rate. However, tracker mortgages tend to have a smaller difference above the base rate, down to around 0.75% or even lower, and they are guaranteed to rise and fall with the base rate.
This means if the base rate rises your monthly payments will rise. If the base rate falls your monthly payments will fall.
The period for which the tracker mortgage applies may be for a fixed term only, say 5 years, after which time the interest rate will revert to the lender's standard variable rate. Tracker mortgages are also available that persist for the full term of the mortgage.
Some mortgage lenders will offer different tracker rates depending on the amount you are borrowing as a percentage of the value of your home (LTV - Loan to Value). For example, 0.75% above the base rate may be offered for a mortgage with an LTV of 90%. Alternatively, 1.5% above the base rate may be offered for a mortgage with an LTV of 95%.
A tracker mortgage may be offered in conjunction with a discount offer. For example, 0.5% above the base rate may be offered for the first 2 years, rising to 0.75% above the base rate after the discount period.
Advantages
- The interest rate payable will usually be lower than the lender's standard variable rate.
- You can benefit from all drops in the Bank of England's base rate as they will always lead to an equivalent fall in your tracker mortgage's interest rate.
Disadvantages
- Early redemption penalties may apply which could extend beyond the end of the discounted period. This means you will be unable to change your mortgage during the 'early redemption penalty period' without paying a fee, which may be up to the value of six months mortgage repayments.
- The Bank of England base rate can be unpredictable and can increase rapidly, resulting in an increase in your monthly payments.
- It is less easy to budget as the interest rate can and will vary.
NB This information is provided to give you an overview of the different types of mortgages available. It is not comprehensive and you should not base your mortgage decision on the information found here. We recommend you seek professional advice in order to determine the most suitable mortgage for you.
