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Tracker Mortgages

A guide to tracker mortgages in the UK.

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Lots of people ask us things like “What is a tracker rate mortgage and how does a tracker mortgage work?”

If like many, you’re wondering this too, then this is the article for you.

In this guide, we’ll be providing the key information you need to know about tracker mortgages, how much you could save on a tracker mortgage and whether Brexit is likely to affect the mortgage tracker rates in the UK.

If you have immediate questions about Tracker Mortgages and would like to speak to someone today, click here. We’ll put you in touch with an expert advisor who can help you with your query.

Tracker mortgage definition: What does tracker rate mortgage mean?

A tracker mortgage is a type of variable mortgage that follows an external interest rate. 

Usually, mortgage providers will use the Bank of England’s base rate to then set the interest rate on their mortgage deals.

As well as this, lenders can also add or deduct a percentage of interest on top of this. 

So, if you were to take a tracker mortgage, your mortgage rate could potentially increase if the external Bank of England Base Rate goes up.

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Tracker mortgages explained

To truly understand tracker mortgages, it’s best to see an example. 

The Bank of England’s Base Rate can fluctuate but at the time of writing, it is 0.75%.

Therefore, if your tracker mortgage is the Base Rate +2%, and the Base Rate rate is 0.75%, you will pay 2.75%. 

However, if the Base Rate increases to 1%, you will pay 3%.

How does a tracker mortgage work?

In terms of how this can affect your mortgage, a change of base rate can affect the amount you pay each month. 

Let’s assume that you have a tracker rate mortgage for £200,000. Your base rate is 0.75% and this is charged monthly. Your lender also charges you 2% per month.

Your monthly mortgage payments would equate to £922.62.

However, if the base rate were to increase from 0.75% to 1%, your monthly payments would increase by £25.80 to £948.42

Over a year, this could cost you an extra £309.60.

Therefore, because of the uncertainty around how much the base rate could change, it’s important to check that you could still afford your repayments if they were to increase.

If you are unsure about how to do this, please feel free to ask an advisor who will be happy to help.

Checking your affordability for a tracker mortgage before applying can save you a lot of time and money in wasted application fees.

What can affect the base rate of a tracker mortgage?

The base rate is set based on the interest rate that the Bank of England pay to commercial banks that they work with. This rate then influences the rates those banks charge people to borrow money or pay on their savings.

To cover their costs, banks need to pay less on savings than they make on lending.

When the base rate decreases, so do interest rates, which inturn affects how much people can save and therefore spend. 

If you are currently saving for a mortgage and the base rate decreases, this could affect how much you are able to save and therefore how long you may have to keep saving.

However, if you have a tracker mortgage and rates decrease, this can be good news as your interest payments may get cheaper.

Why choose a tracker mortgage?

With a level of uncertainty surrounding how much the interest rate of a UK tracker mortgage can fluctuate over time, you may be wondering why so many people opt for one.

Well, as mentioned above, a decrease in interest rates can have a beneficial outcome for tracker rate mortgage customers.

Some tracker mortgage rate customers decide to use the money saved on their interest rate to overpay on their mortgage, which reduces their overall debt and in turn can save them more money in the long run.

How much will I save on my tracker mortgage?

The amount of money that you could save on a Tracker Mortgage is unpredictable as the base rate set by the bank of England could change at any time.

However, as an example, let’s say you have a tracker mortgage of £200,000.

Your base rate is 0.75% and this is charged monthly. Your lender also charges you 2% per month.

Your monthly mortgage payments would equate to £922.62.

However, if the base rate were to decrease from 0.75% to 0.50%, your monthly payments would decrease by £25.39 to £897.23.

Over a year, this could save you £304.68 which could be used to overpay your mortgage.

For an accurate figure of how much you could save on tracker mortgages in the UK, speak to an advisor who can take the time to carefully calculate your quote. 

What is a Shared Ownership tracker mortgage?

A Shared Ownership tracker mortgage is a product which allows the buyer to purchase a share of a property between 25-75%.

This type of product can appeal to first-time buyers as it allows them to get onto the property ladder without having to apply for a larger loan. The buyer is then required to pay rent on the share of the property that they do not own.

If the Shared Ownership mortgage is offered on a tracker basis, the amount of interest that the borrower pays is set based on the base rate.

Shared Ownership tracker mortgage example

Let’s say you buy 50% shares in a property worth £200,000. A lender agrees to loan you 50% of the property value (£100,000.)

The interest that you pay on your mortgage is set based on the current base rate of 0.75%. As well as this, the lender charges you the 2% on top.

Based on the above figures, this would mean that your monthly mortgage payments would be £461.31.

However, you must also remember that rent would be payable on the 50% share of the property that you do not own. 

The amount of rent that you would be charged can vary depending on the house builder’s / association’s terms and conditions but usually if you divide the unsold equity by 100 and multiply by 3 you will get the total rent payable per annum. 

So, £100,000 / 100 = £1,000 (x 3) = £3,000. 

You would then need to divide this by 12 to get the monthly rent payable:

£3,000 / 12 = £250

Therefore, by using the figures in the above example, you could estimate that the monthly  mortgage and rent payments with a Shared Ownership tracker mortgage would be £711.31. Also keep in mind that often with Shared Ownership properties, ground rent and/or service charges can apply, so these costs need to be factored in to affordability too.

What is an interest only tracker mortgage?

An interest only tracker mortgage, is a tracker mortgage with terms that state that the borrower only has to pay the interest of the loan to the lender until an agreed date. 

Usually with interest only mortgages, the borrower pays the interest of their mortgage on a monthly basis and then at the end of the term of the mortgage, the rest of the balance is payable. 

Why not speak to an advisor who can provide you with an Interest Only Tracker Mortgage quote?

Tracker mortgages and Brexit

With so much uncertainty as to how leaving the EU could affect inflation rates, it’s no surprise that we have received an influx of questions asking how Brexit could affect tracker mortgages. 

Tracker mortgages are notorious for being somewhat cheaper than some of the fixed-rate deals provided by many UK lenders. 

However, the base rate has increased in the past which has increased the amount of interest that tracker mortgage customers pay overall.

Many tracker mortgage customers worry that after Brexit there will be a negative impact on the economy which in turn will further increase the base rate that dictates their mortgage payments.

The government is yet to predict the outcomes of Brexit (or indeed finalise the terms of Britain’s exit for the EU) and the knock on effect that this could have on the economy, although the Monetary Policy Committee (MPC), which sets the base rate each month, has said any changes will be ‘gradual and of limited extent.’

Speak to a UK Tracker Mortgage expert

If you’re still thinking, “I don’t know what a Tracker Mortgage is!” don’t worry!

Tracker mortgages can be difficult to get your head around, especially if you are unsure about how much you can afford to borrow.

A mortgage advisor can explain tracker mortgages to you in detail and help you find the right lender for your own unique needs and circumstances. 

 If you have questions about the current base rates for tracker mortgages or if you’re still unsure about what a tracker mortgage is call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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