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A Guide to Tracker Mortgages

No impact on credit score

Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 24, 2021

Tracker mortgages are often a viable alternative to fixed-rate, variable rate and discount rate mortgages, but what exactly are they, how do they work and why would you choose one?

In this guide, we’ll be providing the key information you need to know about tracker mortgages, including how much you could save with one and much more.

What is a tracker mortgage?

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, mortgage 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.

How do they work?

In terms of how a base rate shift can affect your mortgage, it can alter 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 mortgage lender also charges you 2% per month. This means 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.

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 pays 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 in turn 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.

The benefits of a tracker mortgage

The main benefit is that you could save money when interest rates are low. 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.

There are other advantages to consider as well as possible drawbacks to offset them against. See our guide to the pros and cons of tracker mortgages for more information.

How much could I save?

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 mortgage 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.

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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.

How it works

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.

Interest only tracker mortgages

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.

Get matched with a tracker mortgage expert today

Tracker mortgages can be difficult to get your head around, especially if you are unsure about how much you can afford to borrow, but help is at hand! There are mortgage advisors in our network who 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. We’ll match you with a tracker rate mortgage specialist who could help you save time, money and potential disappointment in the long run.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the 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 information 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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