Tracker Mortgages

When you have a tracker mortgage, the interest payments that you make are directly linked to the Bank of England base rate. Your personal interest rate will be set at a percentage above the base rate, as agreed between you and your lender when you take out the deal. The actual amount of interest paid will change every time the Bank of England changes its base rate - and this is reviewed every month by the bank's monetary policy committee.

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A tracker mortgage is similar to a variable rate mortgage but there is an important difference:

  • With a tracker, the interest rate directly tracks all changes to the Bank of England Base Rate. This is reviewed monthly.
  • With a variable-rate mortgage, it is up to the lender whether and when to pass on any cuts or rises.

Most tracker mortgages will follow the Base Rate for a fixed period before moving on to a standard variable rate. Some tracker mortgages will track the base rate for the lifetime of the mortgage.

Pros & Cons of Tracker Mortgages

Tracker mortgages are an alternative to fixed-rate mortgages if you are hoping to benefit from any expected cuts in interest rates. They have been particularly attractive since interest rates started to fall in response to the recession. Since March 2009, the Bank of England's base rate has stood a historic low of 0.5% - resulting in very low interest payments for those on tracker. For example, a mortgage holder with a 25-year £100,000 mortgage paying 1% above the base rate of 0.5% would pay £125.00 a month on an interest-only mortgage, and £399.94 on a repayment mortgage (where the capital of the mortgage is paid off at the same time).

Those opting for a tracker mortgage now are unlikely to secure such favourable rates, however, and it is also unlikely that tracker mortgage rates will fall any further.

Those who do take on trackers should consider the effect of a rise in interest rates, since they will be passed on as soon as they occur. Hefty base rate rises would mean a hefty rise in interest payments. If, for example, the base rate goes up by 2% to 2.5%, then the payments on a 25-year tracker mortgage paying back a £100,000 loan at 1% above base rate - 3.5% - would rise to £291.67 for an interest-only mortgage, and £500.62 for a repayment mortgage.

So, with a tracker you can benefit directly from the currently low Bank of England base rate - expected by most commentators to remain low for some time yet. However, it is important to keep an eye on the base rate. You should be prepared for your mortgage payments to rise when the base rate does. A significant rise in the base rate could make it a good time to move to a fixed-rate mortgage instead.

Choosing a Tracker Mortgage

Trackers have been rising in popularity in recent years, although following the unprecedented low base rate, many of today's deals have margins that are much higher above the base rate than before.

Because spotting the difference between the best tracker and the best variable rate deals can be difficult, we recommend taking unbiased mortgage advice. Speaking to an FSA-authorised mortgage adviser can greatly speed up the process of finding the best deal, and potentially save you hundreds of pounds in mortgage repayments over a year.

Enquiring with an adviser is risk free since the choice is yours. They will offer professional recommendations which you can take or leave. They also have access to some exclusive mortgage deals

For more information on tracker mortgages we recommend you speak with an adviser who will be able to give you mortgage advice.


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