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Tracker Mortgages

If you can afford to be flexible in your mortgage repayments, a tracker mortgage may be right for you.

What is a Tracker Mortgage?

Tracker mortgages charge a variable interest rate, that changes in line with the Bank of England base rate. Typically, these rates will be slightly above this base interest rate (say, 2% higher). Some tracker mortgages may also track the London Interbank Offered Rate (LIBOR).

How is a Tracker Mortgage Repaid?

You can choose to take out a repayment tracker mortgage or interest only. This is where you only pay interest on the mortgage loan amount. You can also choose to take out a tracker mortgage for a fixed period (typically two years). Alternatively, you can choose a Lifetime Tracker mortgage, which tracks current interest rates for the whole of the mortgage term. At the end of a fixed tracker mortgage arrangement, the rate will adjust automatically to the lender’s Standard Variable Rate, which will likely be higher. 

As with all mortgages, there may be arrangement fees (check out this guide to taking out your first mortgage for more information). You may also need to pay exit fees if you choose to remortgage. However, many Lifetime Tracker agreements allow you to exit without any early repayment charges.

Am I Eligible for a Tracker Mortgage?

• Tracker mortgages are a great option for people who can afford to overpay on their mortgage occasionally, as many of these mortgages have no early repayment charges.
• They are also flexible, many lenders will allow you to switch from tracker to fixed-rate, without incurring a penalty, in many cases.
• Trackers are generally suitable for those who can still afford to pay, should the bank of England Base Rate increase.

Let’s Look at an Example:

Jane and Jim have a mortgage at a fixed rate. However, after hearing that the bank of England base rate has lowered, they would like to remortgage and secure a better deal. They have seen that the Bank of England base rate has fallen to 0.25%. They have also found a tracker mortgage that is +1%. Under their new mortgage deal, Jim and Jane now pay just 1.25% interest on their mortgage.

What are the benefits of Tracker Mortgages?

• You may be able to pay your mortgage off quicker, as many tracker mortgage deals allow you to make overpayments without incurring extra charges.
• Your rate is dependent on the Bank of England base rate, so if it lowers your mortgage payments may also lower.
• Many arrangements are flexible, allowing borrowers to switch to a fixed rate for example, without incurring penalty charges.

What are the pitfalls of tracker mortgages?

If the Bank of England Base rate rises, your mortgage payments may also rise. Make sure you have the funds to be able to work with any unexpected increases.

What are the alternatives to Tracker Mortgages?

An offset mortgage will allow you to keep access to your savings as well as benefit from flexible overpayment options.

Fixed rate mortgages, give you assurance that the money you owe every month for your mortgage would be the same, for a fixed period.

Speaking to an independent mortgage broker can help you make the right decision for your circumstances. Get in touch now and get a free mortgage quote.