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What is a tracker mortgage?
A tracker mortgage has a variable interest rate based on a financial indicator. The Bank of England base rate is by far the most commonly used by UK lenders, but there are others.
Your payments go up or down each month, depending on what happens to the indicator your rate follows. When interest rates rise or fall as a result of changes to the indicator, your repayments increase or decrease to reflect this.
Tracker mortgage rates typically start out cheaper than fixed rates, but the lower rate is only locked in for a short period, often two or five years, which is known as an introductory period. When this period ends, lenders switch you to their standard variable rate (SVR).
How do tracker mortgages work?
Tracker mortgage rates vary depending on:
How much you want to borrow
How many years you take the mortgage over
How big your deposit is
Most tracker mortgages are set at a certain level above the indicator they follow. For example, if the tracker is 1% above a 2.5% base rate*, your mortgage interest is 3.5%
Some tracker mortgages have an interest rate floor (which is sometimes referred to as a collar) meaning that your interest rate won't drop below a defined level, even if the rate it follows does.
For example, if the collar is 1.5%, you will continue to pay this even if the base rate fell all the way down to 0%.
*for demonstration purposes only, the current BofE base rate is 3.75%.
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What can cause your tracker mortgage rate to change?
Most tracker mortgages follow the Bank of England (BOE) base rate. Buy-to-let tracker rate mortgages were largely tracked by LIBOR (London Inter-Bank Offered Rate) until 2021 when its use was phased out.
Those mortgages not tracked by the BoE base rate (typically buy-to-let mortgages) are now tracked by the closely linked Sterling Overnight Index Average (SONIA).
Regardless of the type, the indicator is what causes your interest, and your repayments to rise or fall. Always make sure you’re looking at a real tracker linked to an external rate, not a variable mortgage where the rate is chosen by the lender themselves.
How often could my tracker mortgage rate change?
The Bank of England base rate is usually voted on by the Monetary Policy Committee (MPC) eight times a year with occasional emergency meetings on an ad hoc basis.
The base rate usually increases when inflation is on the rise and falls during a recession. This means that staying aware of the UK’s financial climate can be useful if you have a tracker mortgage deal.
What is a collar rate on a tracker mortgage?
A collar rate (sometimes called a rate floor) is the lowest level your tracker mortgage interest rate can fall to, even if the rate it tracks, usually the Bank of England base rate, drops further.
For example, if your tracker has a collar of 2%, your rate won't go below 2%, even if the base rate falls to 0%.
Not all tracker mortgages have a collar. Before you take one out, check your lender's terms to see:
Whether a collar applies
What level it's set at
Whether it changes over the life of the deal
A collar limits how much you can benefit from base rate cuts, so it's worth factoring into your decision if you're choosing between tracker deals.
How long can I get a tracker mortgage deal for?
Tracker mortgage rates come as either fixed-term (lasting for two, three, five or 10 years) or lifetime options.
Fixed-term trackers revert to the lender's SVR at the end of their period, and switching early can incur significant early repayment charges.
A lifetime tracker interest rate lasts until your mortgage is paid off. This type of tracker generally doesn't offer the best interest rates, but often doesn’t have early repayment charges for overpaying or remortgaging (changing to a better mortgage).
Are tracker mortgages a good idea?
Advantages of tracker mortgages
Disadvantages of tracker mortgages
Can I switch from a tracker mortgage to a fixed rate?
Some lenders let you switch from a tracker deal to one of their fixed-rate mortgages part-way through your term, sometimes without an early repayment charge. This is often called a "track and switch" option.
Rules vary a lot by lender, so check:
Whether switching is allowed during your introductory period
Whether you'll be credit-checked again
Whether the new fixed rate has its own early repayment charge
If predictable payments become more important to you partway through a tracker deal, for example, if the base rate starts rising, this can be a useful safety net. Ask your broker or lender what your specific deal allows before you commit to a tracker.
Can I overpay on a tracker mortgage?
Yes. Most tracker mortgages let you overpay, and many allow you to overpay up to 10-20% of your outstanding balance each year without triggering an early repayment charge - though this varies by lender, so always check your specific deal.
Overpaying can be a good strategy on a tracker: if the base rate falls and your payments drop, putting the difference towards your balance can shorten your mortgage term and reduce the total interest you pay. Just be aware that if the base rate rises again, your minimum monthly payment will rise too, regardless of any overpayments you've made.
Tracker mortgage FAQs
What happens when my tracker rate ends?
Your lender will move you to its standard variable rate (SVR), which is likely to be higher, meaning you will pay more each month. This is a good time to shop around for a remortgage deal.
Can I pay off my mortgage before the tracker rate ends?
Yes, but many lenders charge you if you repay or switch your deal before the initial (or introductory) tracker rate ends. This can cost thousands of pounds.
What are the alternatives to a tracker mortgage?
If you want another form of variable rate mortgage, you could opt for a discount rate mortgage, which is a set percentage below the lender’s standard variable rate (SVR) or some lenders will allow you to choose their SVR.
You could also opt for a fixed-rate mortgage deal, which is typically charged at a higher rate of interest, but sets your payments for a fixed period of time.
What's the difference between a tracker mortgage and a discount mortgage?
A tracker mortgage follows an external rate, usually the Bank of England base rate, so your lender has no control over when or how much your rate changes. A discount mortgage is priced as a set percentage below your lender's own standard variable rate (SVR) which the lender sets and can change independently of the base rate. This means discount mortgages can be harder to predict than trackers.
Is a tracker mortgage a good idea right now?
Whether a tracker mortgage suits you depends on your appetite for risk and the current interest rate environment. Trackers tend to work best when the base rate is expected to hold or fall, since your payments benefit directly. If rates are expected to rise, a fixed-rate deal may offer more certainty.
A mortgage broker can talk you through the latest base rate outlook and how it might affect a tracker deal for your circumstances.
Do tracker mortgages have early repayment charges?
Many tracker deals do carry an early repayment charge (ERC) if you repay or switch away during the introductory period, though lifetime trackers often don't. Always check the specific terms of the deal you're considering, as ERCs vary significantly between lenders and can run into thousands of pounds.
Can first-time buyers get a tracker mortgage?
Yes, tracker mortgages are available to first-time buyers, subject to the same affordability and deposit requirements as other mortgage types. Because payments can rise as well as fall, lenders will check you can afford higher repayments if the base rate increases.
How do I know if my tracker mortgage has a collar rate?
Check your mortgage offer document or key facts illustration, any collar (rate floor) will be stated there. If you're unsure, ask your lender or broker directly before committing to a deal.
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