If you’re in the market for a mortgage, you may have heard the term “tracker mortgage” thrown around. But what exactly is a tracker mortgage? It’s a type of mortgage where the interest rate is tied to the Bank of England’s base rate.
This means that your mortgage interest rate will follow suit when the base rate goes up or down.
Tracker mortgages typically have a variable interest rate, which means that your monthly mortgage payments can fluctuate depending on changes to the base rate. While this can be a risk for some borrowers, it can also work in your favour if the base rate decreases, as your mortgage payments will reduce too. However, it’s important to note that tracker mortgages may come with fees, so reading the fine print is essential before signing on the dotted line.
What is a Tracker Mortgage?
A tracker mortgage is a type of mortgage where the interest rate is directly linked to the Bank of England’s base rate. This means that the interest rate on your mortgage will rise and fall in line with any changes to the base rate. For example, if the base rate goes up by 0.25%, the interest rate on your tracker mortgage will also go up by 0.25%.
Tracker mortgages are typically available for a set period, such as two or five years. After this period, the mortgage will usually revert to the lender’s standard variable rate, which may be higher than the tracker rate.
One of the advantages of a tracker mortgage is that it can offer flexibility to borrowers. As the interest rate is directly linked to the base rate, any reductions in the base rate will be passed on to the borrower, which can result in lower mortgage payments.
However, it’s important to note that tracker mortgages can also be risky, as any increases in the base rate will also be passed on to the borrower, resulting in higher mortgage payments.
How Tracker Mortgages Work
If you are looking for a mortgage, you may have encountered the term “tracker mortgage”. These types of mortgages are a popular option for many borrowers. Here’s how they work
Tracker mortgages are a type of variable rate mortgage. This means that your interest rate can go up or down over time. However, tracker mortgages are directly linked to the Bank of England’s base rate, unlike other variable rate mortgages.
Your interest rate will always be a certain percentage above or below the base rate.
For example, if the base rate is 1% and your tracker mortgage is 1% above the base rate, your interest rate would be 2%. If the base rate increased to 2%, your interest rate would increase to 3%.
Tracker mortgages usually have a fixed term, such as two, three, or five years. During this time, your interest rate will track the base rate. After the fixed term ends, your mortgage will usually switch to the lender’s standard variable rate.
It is important to note that tracker mortgages can come with early repayment charges. You may have to pay a fee if you decide to repay your mortgage early or switch to a different mortgage product during the fixed term.
Benefits of a Tracker Mortgage
If you’re thinking about what are the good and bad sides of a tracker mortgage, there are several benefits to take into account. Here are two key advantages:
One of the main benefits of a tracker mortgage is transparency. With a tracker mortgage, your interest rate is directly linked to the Bank of England’s base rate. This means you can quickly see how changes in the base rate will affect your mortgage repayments. This transparency can be helpful when planning your finances, as you can anticipate any changes to your monthly payments.
Potential for Lower Interest
Another advantage of a tracker mortgage is the potential for lower interest rates. If the Bank of England’s base rate falls, your mortgage payments will also decrease.
This can be a significant advantage if you’re looking to save money on your mortgage repayments. However, it’s worth noting that your payments will also increase if the base rate rises.
Drawbacks of a Tracker Mortgage
If you are considering a tracker mortgage, it is essential to understand the potential drawbacks of this type of mortgage. This section will discuss two significant disadvantages of a tracker mortgage: uncertainty and the potential for higher interest rates.
One of the most significant drawbacks of a tracker mortgage is the uncertainty that comes with it. The interest rate on a tracker mortgage is linked to the Bank of England’s base rate, meaning it can fluctuate at any time. Your monthly mortgage payments can change, making it difficult to budget and plan for the future.
Potential for Higher Interest Rates
Another significant drawback of a tracker mortgage is the potential for higher interest rates. While a tracker mortgage can be an excellent option when interest rates are low, your monthly mortgage payments will increase if they rise.
This means that you could end up paying more than you would with a fixed-rate mortgage.
It is also worth noting that some tracker mortgages come with a cap on the interest rate. Even if interest rates rise, your mortgage payments will not exceed a certain amount. However, these caps are often high, meaning you could still pay more than you would with a fixed-rate mortgage.
Who Should Consider a Tracker Mortgage
A tracker mortgage might be the right choice if you are looking for a flexible mortgage. Here are a few reasons why you should consider a tracker mortgage:
You Want to Benefit from Interest Rate Changes
A tracker mortgage is linked to the Bank of England base rate, which means that your interest rate will change in line with any changes to the base rate. If the base rate goes down, your interest rate will go down; if the base rate goes up, your interest rate will go up.
This can be beneficial if you think interest rates will likely go down, as you can take advantage of any rate cuts.
You Want to Avoid Early Repayment Charges
Tracker mortgages often have lower early repayment charges than fixed-rate mortgages. This means that if you want to pay off your mortgage early, you may be able to do so without incurring a significant penalty. This can be useful if you are planning to move house or remortgage in the near future.
You Are Comfortable with Fluctuating Payments
As your interest rate will change in line with the base rate, your monthly mortgage payments will also fluctuate. If you are comfortable with this level of uncertainty and can budget accordingly, a tracker mortgage could be a good option for you.
However, a fixed-rate mortgage might be a better choice if you prefer the certainty of fixed monthly payments.
Overall, a tracker mortgage can be a good option for those who want to benefit from interest rate changes, avoid early repayment charges, and are comfortable with fluctuating payments. However, it is crucial to consider your circumstances and financial situation before deciding.
How to Get a Tracker Mortgage
Getting a tracker mortgage can be a great option if you’re looking for a flexible mortgage with interest rates that move up and down in line with the Bank of England’s base rate. Here are some ways to get a tracker mortgage:
Many lenders offer online applications for tracker mortgages. This can be a quick and convenient way to apply, and you can often get an instant decision.
Ensure you have all the necessary information before you start your application, such as your income and outgoings, as well as details of the property you want to buy.
Use a Mortgage Broker
Using a mortgage broker can be an excellent way to find the best tracker mortgage deals. A broker can search the whole market to find the best deals for you and can often get access to exclusive rates that aren’t available to the public. They can also help you with the application process and offer advice on other aspects of buying a home.
Speak to Your Bank
If you have a good relationship with your bank, it can be worth speaking to them about getting a tracker mortgage. They can offer you a good deal, especially if you have a good credit history and a stable income.
However, it’s always worth shopping around to ensure you get the best deal as they will only show you products linked to their brands, other banks may have better offers but sometimes there are good discounts on products when you hold a current account with a bank so explore that option as well.
Search the Whole of the Market
If you want to ensure you’re getting the best deal on a tracker mortgage, it’s worth searching the whole market. This means looking at all the available lenders and deals rather than just going to your bank or a specific lender. You can use comparison websites to help you find the best deals, or you can use a mortgage broker to do the searching for you.
Getting a tracker mortgage is a great option if you’re looking for flexibility and the potential for lower interest rates. By applying online, using a mortgage broker, speaking to your bank, or searching the whole market, you can find the best deal for your needs.
Tracker Rate Mortgages - Summary
In conclusion, a tracker mortgage is a type of mortgage where the interest rate is linked to the Bank of England’s base rate. This means that if the base rate goes up, your mortgage payments will increase; if it goes down, your payments will decrease. Tracker mortgages are often seen as a good option for those who want to take advantage of any potential drops in interest rates.
It is important to note that tracker mortgages are not for everyone. They can be risky if you are on a tight budget, as your mortgage payments could increase unexpectedly if the base rate goes up. Additionally, a fixed-rate mortgage may be a better option if you are looking for stability in your mortgage payments.
When considering a tracker mortgage, it is essential to research and compare different options to find the best deal for you. Look at the interest rates, fees, and any additional features each lender offers.
Consider seeking advice from a mortgage broker to help you find the right mortgage for your needs.
Overall, a tracker mortgage can be a good option for those who are comfortable with some level of risk and want to take advantage of potential drops in interest rates. However, it is essential to carefully consider your financial situation and do your research before making a decision.