Tracker mortgages offer you a Variable Rate Mortgage with an interest rate that rises and falls in line with a specific benchmark, usually the Bank of England Base Rate. The tracker rate would be expressed as a certain percentage rate above or in some cases below the benchmark rate.
There are usually no penalties for cancellation and for transferring to another mortgage product or to another lender (known as redemption penalty and lock-in periods) giving you the flexibility to change your mortgage type or move to a different lender.
Interest rates can go up as well as down. When it rises sharply your payments may increase substantially.
Who will own my home if I take out Equity Release? – With a lifetime mortgage you will retain ownership of your home, however with a home reversionary plan the lender will own your home. UK Property Finance can give you friendly and helpful advice.
How Do Tracker Mortgages Work?
If and when the Bank of England base rate changes, with a tracker mortgage, so does your mortgage rate. When agreeing a tracker mortgage, the interest rate will be based on the Bank of England base rate, plus or minus a certain amount. For example, your agreed monthly mortgage rate could be the Bank of England base rate plus 2%. This would mean that if the base rate was 0.5%, your monthly interest rate would be 2.5%.
As the Bank of England base rate is subject to change, all such changes (positive or negative) will the reflected in your own monthly interest rate. If the base rate was to suddenly jump to 1.5%, your monthly interest rate would increase to 3.5%. Conversely, any decreases in the base rate would result in a lower monthly interest rate on your mortgage.
It is therefore important to ensure that you can afford your monthly tracker mortgage repayments in the event of a base rate increase.
What is the Difference Between a Tracker Mortgage and a Variable Mortgage?
Tracker mortgages and variable mortgages are often confused as the same thing. The biggest difference being that with a variable mortgage, the lender has total freedom to set their own rates of interest and to charge them at any time. With a tracker mortgage, adjustments are only made if and when the Bank of England base rate changes.
This means that tracker mortgages are usually more cost effective and secure than variable mortgages, though there are exceptions when this is not the case.
How Often Do Base Rates Change and Affect Tracker Mortgages?
It is possible for the Bank of England to alter its base rate on a monthly basis. Adjustments can be made by the Bank of England on the first Thursday of each month, though it is comparatively rare for the rate to be adjusted.
Base rates usually decrease during times of economic difficulty and recession and subsequently increasing when the economy performs better.
What is an Interest Rate Collar?
In order to protect their own interests and income, lenders often impose ‘rate collars’ when offering tracker mortgages. Where applicable, this means that the monthly rate of interest charged cannot go below a certain predetermined level.
In a typical working example, the interest rate collar could be set at 2%, meaning that irrespective of how low the Bank of England base rate, the rate of interest payable will never be less than 2%.
How Long Do Tracker Mortgage Deals Last?
The period during which the interest rate of a tracker mortgage follows Bank of England base rates is usually two, three, five or ten years. At the end of which the loan will be transferred to a variable rate facility, which may result in significantly higher monthly interest rates.
This is therefore the perfect time to consider switching to a more competitive deal with a different provider. Compare the market for free with UK Property Finance to find an unbeatable deal when your initial tracker mortgage period comes to an end.
What Are the Advantages of a Tracker Mortgage?
The biggest benefits of taking out a tracker mortgage include the following:
- Monthly interest rates during the introductory period can be much lower than conventional mortgage rates.
- The lender must strictly follow the Bank of England base rate and therefore cannot excessively increase monthly interest rates.
- When the Bank of England base rate drops, especially for long periods, tracker mortgages continue to represent excellent value for money.
- Any potential increases in the Bank of England base rate are likely to be minimal, rather than sudden and severe.
- Tracker mortgages are sometimes easier and more affordable to repay early than comparable types of mortgages.
What Are the Disadvantages of a Tracker Mortgage?
There are also potential disadvantages to a tracker mortgages to consider, which include:
- Any increases in the Bank of England base rate will be reflected in your monthly mortgage repayments. This can make it difficult to know exactly how much you can expect to pay from one month to the next.
- If an interest rate collar is applied, you monthly interest rate will never fall below the agreed percentage, irrespective of what happens to the base rate.
- Tracker mortgages are almost always switched to standard variable rate products at the end of the initial term, which can attach much higher rates of interest.
Comparing Tracker Mortgage Deals
Getting the best possible deal on a tracker mortgage (or any other home loan) means comparing as many deals as possible from specialist lenders across the UK. At UK Property Finance, we provide a whole of market brokerage service for domestic and commercial customers.