What are tracker rate mortgages?
A tracker rate mortgage is a type of variable mortgage that follows a specific economic indicator, typically the Bank of England base rate.
The interest rate on a tracker mortgage is usually set at the base rate plus an agreed fixed percentage. As the base rate fluctuates, your mortgage repayments can rise or fall in line with those changes.
How do tracker rate mortgages work?
With a tracker mortgage, an additional fixed percentage, typically between 1.2% and 2%, is added to the base rate. If the BoE base rate rises, your mortgage interest rate and monthly repayments will increase accordingly.
What the benefits of tracker rate mortgages?
When interest rates are low, tracker rate mortgages can be an attractive option, particularly if you are planning to move home in the next 1-2 years. This type of mortgage can offer lower initial repayments, benefiting from the low rates before any potential increases.
What are the disadvantages of tracker rate mortgages?
A tracker rate mortgage means your payments can fluctuate, which may not suit everyone, as many prefer the stability of fixed monthly payments for easier budgeting. If interest rates rise, you won't have the protection provided by a fixed-rate mortgage, meaning your repayments could increase.
With a tracker mortgage, you typically commit to a fixed term for tracking, usually around two years, though some deals can last for the entire mortgage term. Similar to fixed-rate mortgages, if you make changes or exit the agreement early, you may incur early repayment charges.
Which lenders offer tracker rate mortgages?
Almost all lenders offer tracker rate mortgages, which are the second most popular type of mortgage after fixed-rate options. These mortgages provide flexibility by adjusting with changes in the base interest rate, appealing to those comfortable with potential fluctuations in payments.
What should I watch out for?
Most tracker mortgages follow either the Bank of England base rate or the LIBOR rate. However, be cautious of deals that mention other reference rates, as these may be controlled by the lender.
Additionally, it's important to ensure that the tracker mortgage agreement states the interest rate will only change when the reference rate changes. There should be no other reasons for adjusting the rate within the terms of the agreement.