In This Article
What is a tracker rate mortgage?
A tracker rate mortgage is in line with another benchmark, tracking it at a certain level.
With residential mortgages and buy to let mortgages, this usually refers to the Bank of England base rate.
If you are to take a base rate tracker mortgage, the interest rate will remain a certain percentage above the base rate for the period.
For instance, if your agreed interest rate is 2% above the base rate, and the base rate was at 2.25%, this would give you a total interest rate of 4.25%.
If the base rate was to rise or drop, your interest rate will rise or drop accordingly.
This means that you cannot be certain of what your rate will be within the tracker period, as it is dictated by the Bank of England base rate.
This may suit some borrowers that believe interest rates are due to drop, and do not want to fix in at a premium.
Whatever your plan is, you should look for an experienced mortgage adviser that can tell you the pros and cons of tracker rates, along with any other products, so that you can make a decision.
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Are tracker mortgages riskier than fixed mortgages?
Some people believe that tracker rate mortgages are higher risk than fixed mortgages due to the uncertainty of future payments.
However, there are some borrowers that consider fixed mortgages to be risky too, if rates are high.
For instance, if you are to fix your mortgage at 5.5%, and there is a base rate tracker mortgage of 1% above the Bank of England base rate, and the base rate is 2.25%, the fix mortgage is 2.25% higher than the tracker product.
There are borrowers that would be more comfortable paying for the fixed rate product knowing that the rate cannot move within the fixed period.
Having said that, there are also many borrowers that are not willing to pay this premium, and happier knowing that their interest rate could drop if the base rate went down.
Fixed rate mortgages generally have early redemption penalties too, whereas there are often more tracker rate products than fixed rate products that are penalty free.
Make sure that you get professional mortgage advice to understand the pros and cons of tracker rates and fixed rates, and all penalties associated with the products.
This will allow you to make an informed decision once you have all of the information.
Is it a good time to have a tracker rate mortgage?
It is impossible to confirm whether it is a good time to have a tracker rate mortgage, as they will not appeal to all people.
At the time of writing, interest rates have been volatile with multiple recent successive rate rises.
If this is to carry on, having a tracker rate product may not be best as the payments will increase in line with the Bank of England base rate changes.
However, if the base rate drops in the near future, it may prove that taking a tracker rate product saved you money against some of the current fixed rate deals.
A person’s attitude towards risk will also come into it, so being comfortable with the mortgage product that you have got is very important.
You should look for a qualified mortgage adviser that can take the time needed to understand your full situation, objectives, and attitude to risk, to make a bespoke recommendation.
Most mortgage advisers will be willing to offer you a free consultation before any chargeable work is undertaken.
What does a 2-year tracker mean?
A 2-year tracker mortgage tracks the Bank of England base rate for this period of time.
Tracker rate mortgages can run for any period determined by the lender.
For instance, 2, 3 or 5 years. Some may even track the base rate for the duration of the mortgage.
If you take a 2-year tracker mortgage, it will remain a certain percentage above the Bank of England base rate, and then revert to the lender’s standard variable rate after this time.
If there was a penalty on your mortgage for redeeming early, once it goes on to the lender’s standard variable rate, you are free to pay the mortgage off without incurring a penalty.
Your lender will be able to confirm whether there is an early repayment charge on your mortgage account.
Is a tracker mortgage the same as a discounted mortgage?
Tracker rate mortgages are not the same as discounted mortgages.
Tracker rates that track the Bank of England base rate move up and down the moment the base rate changes.
Discounted variable rate mortgages are offered by lenders, a certain percentage below their standard variable rates.
For instance, if a lender’s standard variable rate is 4.99%, and it is discounted by 2% for 3 years, the initial rate would be 2.99%.
If the lender increased the variable rate to 5.49%, this would increase the discounted mortgage to 3.49%.
With a tracker, the lender has no control over what the base rate is, so besides setting the amount above the rate that tracks it, they cannot influence the base rate.
With a discounted variable mortgage, the lender has the power to change their standard variable rate therefore affecting the interest rate on your discounted variable mortgage.
A mortgage adviser will be able to explain the two products in more depth to help you find a suitable solution.
Should I be fixing my tracker rate mortgage?
If you are on a tracker rate at the moment, you may wish to consider fixing at this time, however, you should not do this without taking professional mortgage advice.
It may well be that your current tracker rate product is best suited for you over any fixed rate deals.
If however, you are concerned about interest rate movements and your main priority is to know exactly what you were paying for a certain amount of time, a fixed rate mortgage will offer this.
Fixed rate mortgages cannot move regardless of what happens to interest rates or the economy.
During the fixed period, the rate will remain the same until the mortgage reverts to the standard variable rate, after the agreed period, for example, 5 years.
If you move to a fixed rate product from a tracker rate mortgage, you may be paying a premium to do so.
Talk to an independent mortgage adviser that is regulated by the Financial Conduct Authority, for them to discuss your current product, and alternatives in the market.
Once they understand your full situation, they can make a recommendation accordingly.
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Do tracker mortgages have early redemption penalties?
Some tracker rate mortgages have early redemption penalties for paying off the mortgage during the initial period.
For example, if the product is a 2-year tracker deal, there may be a penalty for repaying it within the 24 months.
There are however many tracker rate mortgage products that do not have a penalty for repaying them early.
This can add a layer of flexibility if you believe there is a large chance that you will need to repay the mortgage early, for example, if you plan to sell the property in one year.
Make sure you tell your mortgage adviser your future plans, so they can look for a product that is suited to your situation.
Conclusion
With recent Bank of England base rate movements, many people are concerned about having a variable mortgage rate.
However, there are occasions where a tracker rate mortgage suits the borrower.
For example, in situations where they believe that interest rates are due to drop, or where fixed rates are at a substantial premium.
As a result, you should seek professional financial advice in order to select a mortgage rate that is suitable for your situation.
Most mortgage advisers will be willing to offer a free consultation so a potential borrower understands their options.
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