Tracker Mortgages Explained

What Is a Tracker Mortgage?

A tracker mortgage is a type of variable rate mortgage where the interest rate follows, or 'tracks', an external rate. In the vast majority of cases, this is the Bank of England base rate. Your mortgage rate is set at a certain percentage above (or occasionally below) this base rate.

For example, if your tracker is set at base rate plus 1% and the base rate is 4.5%, you'd pay 5.5%. If the base rate rises to 5%, your rate moves to 6%. If it falls to 4%, your rate drops to 5%.

Tracker mortgages are available for set periods, typically two or five years, or as lifetime trackers that last for the entire mortgage term. They offer transparency because your rate moves directly in step with the base rate, with no hidden margins or discretionary changes from the lender.

How Does a Tracker Mortgage Differ From Other Variable Rates?

The key difference between a tracker and other variable rate mortgages is transparency. With a standard variable rate (SVR), your lender can change the rate at their discretion. With a discount mortgage, you get a reduction off the SVR, but the SVR itself can move unpredictably.

A tracker, by contrast, is tied directly to the base rate. Your lender cannot change the margin above the base rate during the deal period. This means you always know exactly why your rate has changed and by how much.

This transparency makes tracker mortgages attractive to borrowers who want a variable rate but don't want to be at the mercy of their lender's pricing decisions. However, you are still exposed to movements in the base rate, which can go up as well as down.

Advantages of Tracker Mortgages

Tracker mortgages can offer lower initial rates than fixed rate deals, particularly when interest rates are stable or expected to fall. If the base rate drops during your tracker period, your payments will fall automatically, potentially saving you a significant amount of money.

The transparency of a tracker is another major benefit. You always know exactly how your rate is calculated and why it has changed. There's no guesswork or concern about your lender making discretionary rate increases.

Some tracker deals also come with no early repayment charges, giving you the flexibility to remortgage or move house without penalty. This can be a significant advantage if your circumstances might change during the deal period.

Risks and Disadvantages

The biggest risk with a tracker mortgage is that the base rate could rise, pushing your monthly payments higher. Unlike a fixed rate, there's no cap on how much your payments could increase unless your tracker specifically includes a ceiling or cap.

This uncertainty can make budgeting more difficult. If you're on a tight budget, a sudden increase in the base rate could put real pressure on your finances. Stress-testing your budget against potential rate rises is essential before choosing a tracker.

Some tracker deals do include early repayment charges, particularly during an initial deal period. Make sure you understand the terms before committing, especially if there's a chance you might want to switch to a fixed rate if rates start rising.