Tracker Mortgages

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Tracker mortgages trail the Bank of England's base rate. So, when a lender provides a borrower with the money to buy their home, the interest the borrower must repay each month is arranged according to the level at which the Bank of England has set the base rate.

Most lenders charge a rate which is slightly above or below the interest rate. So it is common to hear mortgage providers promoting their tracker rate as "base rate plus one per cent" or "base rate plus 1.89 per cent".

However, if the Bank of England's base rate goes up by one per cent the tracker mortgage's repayment rate will go up by one per cent. Likewise, if the base rate tumbles by 0.5 per cent, so will the tracker rate.

A borrower usually signs up to a tracker for a certain period of time - two years, for example. However, unlike fixed-rate mortgages, the rate the mortgage is at when the borrower begins the term could change. If interest rates are going through a volatile period, they could change frequently.

Who are Tracker Mortgages for?

People most ideally suited to tracker mortgages are those who want a cheap initial rate but who are prepared, financially, for the possibility this rate could rise.

It is a dilemma that many face when they come to remortgage. Do they enjoy the security, but slightly higher rates, of a fixed deal? Or should they take a risk on interest rates plummeting? A first-time buyer, who has tight finances, might be tempted by a tracker deal but might find themselves struggling with repayments if interest rates soared a year into their deal.

Pitfalls of Tracker Mortgages

The major pitfall is that whilst rates can go down, they can also go up. Repayments could increase significantly in a space of time as short as a year.

It is also worth being vigilant in times of falling interest rates. Some lenders specify a "floor" or a "collar". This is a minimum interest rate which, if reached by the Bank of England's base rate, the tracker rate will stop falling for borrowers. Check the small print before signing up for a tracker deal - if the collar is too high, it might be pointless taking out the mortgage.

In times of tumbling interest rates it is also common for lenders to withdraw their tracker mortgages after the Bank of England has announced a cut. The lenders usually re-launch these products with higher charges, or slightly higher interest rates. Whilst this does not affect existing borrowers, it means new customers cannot benefit from lowered rates.

Some tracker mortgage lenders also have early repayment charges - watch out for these as they can often be quite hefty. Extended early repayment charges are also common and force borrowers to pay the lender's standard variable rate after the term of the original mortgage has finished - this rate is usually much higher.

Where to buy Tracker mortgages

Tracker mortgages are one of the most common and popular mortgage deals and therefore almost all the big high street banks and building societies provide them.

As there are so many, scouring the market for the best deal is essential. A mortgage broker, especially one which offers free advice and is independent, will be able to help. Price comparison websites are also a good place to assess the market, but they usually only have a smaller selection of offers.

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