What is a tracker mortgage? - Mortgages - Guides | moneyfacts.co.uk


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What is a tracker mortgage?

Category: Mortgages
Author: Tim Leonard
Updated: 26/11/2018

Tracker mortgages are basically a type of variable rate mortgage. What makes them different from other variable rate mortgages is that they follow – track – movements of another rate. Most commonly, the rate that is tracked is the Bank of England Base Rate.

Tracker rates do not match the rates they track, but are at a 'margin' above that rate. Introductory offers tend to have a lower margin, for example Base Rate plus 1.00%. So, with base rate at 0.75%, the rate paid would be 1.75%. Longer-term tracker mortgages would have a larger margin, for example base rate plus 3.5%. Tracker rates can be for an introductory period (typically anything from one year to five years), or you can get a lifetime tracker, which means that you'll be on it for the whole term of your mortgage.

If you're on an introductory tracker rate, your mortgage will usually go onto a Standard Variable Rate or another tracker rate (with a higher margin) at the end of the initial term.

Some mortgage lenders also put you onto a tracker rate once you've finished an introductory fixed mortgage deal.

How does a tracker rate mortgage work?

A tracker rate follows another rate. It can track below the rate it is following, but more commonly it tracks at a percentage above it.

As the rate is variable, you benefit from lower payments when the rate is low, but will suffer from higher payments if the rate being tracked goes up.

Introductory tracker rates can be among the very lowest mortgage interest rates available. However, like all variable rates, they can go up as well as down. Also, most introductory tracker rates will most likely have an Early Repayment Charge if you remortgage or repay the mortgage during the introductory period. If you're on a lifetime tracker mortgage, there will sometimes be an Early Repayment Charge for a period after you take it out.

Most tracker rate mortgages will let you make overpayments without charging an Early Repayment Charge – usually you're allowed to overpay up to 10% of the outstanding mortgage balance per year.

If you've come onto a tracker rate after being on an introductory fixed or tracker deal, there aren't normally any Early Repayment Charges if you want to overpay, remortgage or pay off the mortgage early (although check with your lender prior to making any decision).

Some trackers can only go so low…

It's become more common for some mortgage lenders to put a collar rate on their tracker mortgages.

A collar rate basically means that your rate can't go below a certain minimum level.

So, if the rate being tracked goes below the collar rate, your payments won't go down any further.

Tracker rate mortgages: advantages and disadvantages

If interest rates go down, so will your payments If the tracker mortgage has a collar rate, you won't benefit if rates fall below a certain level
Introductory tracker rates can be among the lowest variable interest rates you can get If interest rates go up, your payments will go up. This can substantially add to your monthly outgoings
Arrangement fees for tracker mortgages tend to be lower than for fixed rates If you want to repay your mortgage early, or remortgage during the initial period, you may have to pay an Early Repayment Charge
Early Repayment Charges can be less expensive for tracker mortgages in comparison to fixed rates When the introductory rate period ends, you'll go onto another (usually higher) tracker rate or your lender's Standard Variable Rate. Depending on the interest rate climate, this could mean that your payments suddenly make a jump (at this point you can still remortgage to a different lender, or arrange a new mortgage deal with your current lender to save money)
Some mortgage lenders offer a 'switch & fix' feature, which means you can change to one of their fixed mortgages if rates go up, without paying an Early Repayment Charge

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