A tracker mortgage is a type of variable rate mortgage where the rate usually rises and falls in line with movements in the Bank of England’s base rate, plus a set percentage.

This means that your monthly repayments on a tracker mortgage will change every time the base rate increases or is cut. 

Here, we explain how tracker mortgages work and in which circumstances you might choose one of these deals over a fixed rate mortgage.

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How does a tracker mortgage work?

Unlike a fixed rate mortgage, your repayments on a tracker mortgage can change month to month. The amount you pay is based on “tracking” another interest rate, meaning that if this rate goes up or down over the course of a month, you will pay more or less interest. Most tracker mortgages track the Bank of England’s base rate, with a rate that’s usually a fixed percentage above this. However, in some cases, a tracker mortgage can also track a variable rate set by the mortgage provider.

If you have a tracker mortgage that tracks the Bank of England base rate, your repayments could potentially change as many as eight times a year, as this is the number of times the BoE’s committee meets to decide on interest rate changes (excluding additional emergency meetings).

Tracker mortgages tend to be popular when interest rates are low or predicted to fall, as this means that your mortgage repayments could reduce over time. However, most tracker mortgages come with a ‘collar’ which is a minimum rate below which they cannot drop. A few tracker mortgages come with a ‘cap’ as well that’s essentially a maximum rate, but these aren’t common.

The rate you get from a tracker mortgage will not be the exact base rate – generally, a fixed percentage is added on top. For example, if your tracker mortgage rate is the BoE base rate plus 0.25% and the base rate is 4%, you will pay 4.25% interest that month. If the base rate increases to 4.5% the following month, you will pay 4.75% interest, and so on.

A tracker mortgage may run for a certain time period, or it’s possible to get a lifetime tracker. The former, like a fixed-rate deal, will last usually between two and five years – after which you will be moved onto your lender’s Standard Variable Rate (SVR), which is typically much higher. A lifetime tracker, on the other hand, will last as long as you have your mortgage.

What are the pros and cons of a tracker mortgage?

The main advantage of a tracker mortgage is that you may benefit from lower mortgage repayments if interest rates fall. By contrast, if you’re locked into a fixed rate, this means you have the security of fixed monthly repayments but you won’t pay less during the term if interest rates fall.

Some tracker deals do not have early repayment charges (ERCs) either, in case you decide you would like to overpay some of your mortgage to reduce your monthly payments.

The main disadvantage, of course, is that the exact opposite scenario could happen – if interest rates rise then so will your repayments. For this reason, it’s essential to factor in the potential cost of higher repayments if you choose a tracker mortgage and ensure you could afford them.

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So-called ‘collar’ rates also mean that there is a limit to how low your payments can go. Make sure to check what the collar rate on a tracker mortgage is before applying to avoid a shock if you expect your rate to fall, and it doesn’t.

Even if interest rates do swing in your favour, the unpredictable nature of variable rate mortgages can be stressful. You may find that you prefer the certainty of knowing how much your mortgage repayments will be each month over having to hold your breath to find out. This also makes it much easier to budget for other aspects of your life. Read more in our article Should I go for a fixed or variable rate mortgage?

Should I get a tracker mortgage?

Whether or not you decide to get a tracker mortgage depends on your preferences and personal financial circumstances. While they can be beneficial in a climate of falling interest rates, they are also a gamble, as no-one can be certain which way interest rates will move in the future. You may be better off searching for a fixed-rate deal with repayments that you can budget around instead.

If you are uncertain about which option would suit you best, or need more help understanding tracker mortgages, it can help speak to a mortgage advisor.

Want to speak to a mortgage advisor? Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage.

If you’re looking for expert mortgage advice, you can get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.

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