The Pros And Cons Of A Tracker Mortgage
What is a two-year tracker mortgage and is now a good time to get one? Find out here.
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When you’re looking for a mortgage, you’ll often find that tracker mortgages are listed among the cheapest deals currently available. You may be wondering if this is the right type of mortgage for you and how it compares to others.
While only a professional broker can answer those questions for you personally, this guide will explain the pros and cons, and some of the cases where a tracker mortgage might be appropriate.
We’ll cover the following topics…
What is a tracker mortgage?
A tracker mortgage has its name because it tracks the Bank of England base rate (or occasionally a different base rate). When the base rate rises, the tracker mortgage rate will rise. When the base rate falls, the tracker mortgage rate will fall. It will always remain a specified percentage point above the base rate.
So, a tracker mortgage is a type of variable rate mortgage, meaning the rate you pay can be different from one month to the next. Your mortgage repayment amount can increase or decrease several times throughout your mortgage term. It won’t always, but there’s no way to predict this with certainty.
How do they work?
Sometimes, the Bank of England base rate stays the same for long periods. For example, throughout 2013, 2014, and 2015, the base rate was 0.5%. So, if you had a tracker mortgage in that period, your rate would remain the same (likely around 1-2% higher than the base rate) and your repayments would remain the same.
For nearly two years now the Bank of England base rate has been rapidly rising. In December 2021 it was 0.1%. It has risen fourteen times since then and is currently 5.25% (November 2023). So, if you’ve had a tracker mortgage since 2021, your repayments will have risen fourteen times during this period.
How long can you get one for?
With a lifetime tracker mortgage, you can get a tracker rate for the full mortgage term, i.e. until you sell the home or pay off the mortgage. Most lenders have a maximum mortgage term of 35 or 40 years – although you’ll only be approved for a mortgage this long if you’re many years from retirement. 25 years is more typical.
An advantage of lifetime tracker mortgages is that they never defer to the lender’s SVR (which is typically higher). If you decide to switch to a fixed rate at any point, you can do so, but you may need to pay an early repayment charge.
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Are tracker mortgages a good idea now?
Tracker mortgages are best when interest rates are low. Interest rates are currently at a 14-year high, although they have been higher in the past. There’s no right answer for everyone, so whether a tracker mortgage is a good idea for you now depends on your circumstances.
Here are a couple of examples:
- If you are struggling to budget in the current financial conditions and would find any increase to your mortgage repayments to be unaffordable, a tracker mortgage is probably not the right choice for you.
- If you plan to move within the next two years and, therefore, don’t want to be locked into a fixed rate for two years or more, a tracker mortgage might be a better choice than the lender’s SVR.
Current rates and deals available
Take a look at our rates table below to get an idea of the latest tracker mortgage deals on the market.
Looking for more rates and deals?
We can match you with a mortgage broker who can provide you with up-to-date bespoke rates and deals from across the entire market.
Last updated October 2023
The rates quoted above were correct at the time of writing and are subject to change at any time at the lender’s discretion. Speaking to a mortgage broker is the best way to keep track of the rates available at any given time.
What are the pros and cons of these mortgages?
All mortgage types have pros and cons. You should consider these carefully before making your decision.
Your mortgage rate will automatically fall when interest rates fall, so you’re not locked into a high rate
Your lender’s tracker rate will almost certainly be below their standard variable rate (SVR), and usually below their current initial fixed rate
Your lender cannot increase your tracker rate by more than the Bank of England base rate rises
Some tracker mortgages are capped, so they won’t rise above a certain rate even if the base rate continues to rise
Tracker mortgages often don’t have early repayment charges (or have lower charges than fixed-rate mortgages), so it’s easier to move home or remortgage if you want to. If interest rates start to rise rapidly, you can switch to a different mortgage type.
If the base rate rises, your repayments become more expensive
If you choose an uncapped tracker mortgage, there’s no limit to how much your repayments can increase
If you choose a capped tracker mortgage, the initial rate will likely be higher
If your tracker mortgage has a collar, you might not benefit from super-low rates if the base rate falls
You may find that it’s harder to budget if you don’t know how much your mortgage repayment will be each month ahead
If your tracker mortgage does have an early repayment charge, it can cost you thousands to switch to a different mortgage type if you need to
How a broker can help you get the best tracker deal
There are three key benefits to working with a broker if you’re considering a tracker mortgage:
- A broker can advise you on whether a tracker mortgage, discounted-rate mortgage, or fixed-rate mortgage is best for you
- They’ll have access to all the mortgage deals that are currently available (including those that aren’t publicly advertised) so they can help you find the lowest tracker rate
- They understand the lending criteria of each provider so you can feel confident that you’ll be approved the first time around
So, if you have any questions about tracker mortgages, it’s worth having a chat with a specialist. We can put you in touch with someone if you fill out this form.
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Different types of tracker mortgages
All tracker mortgages are designed to rise and fall following a base rate, but there are different types with different features:
- Capped tracker mortgages will never rise above a certain level
- Collared tracker mortgages will never fall below a certain level
- Two-year tracker mortgages will defer to the lender’s SVR after two years
- Five-year tracker mortgage will defer to the lender’s SVR after five years
- Lifetime tracker mortgages will continue at the tracker rate for the full mortgage term
- Offset tracker mortgages allow you to reduce the interest you pay based on money you have in a linked savings account
Are these mortgages cheaper than others?
When comparing the mortgages offered by one lender, you’ll typically find that the discounted rate is the lowest, followed by the tracker rate, then the fixed rate, and the standard variable rate is the highest.
However, you should bear in mind that all except the fixed rate can change over time. Several months into your mortgage, you could be paying far more with a discounted rate or tracker rate than you would have been paying with a fixed rate. You could also be paying less. It all depends on how interest rates change.
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Tracker vs fixed-rate
One of the main alternatives to a tracker mortgage is a fixed-rate mortgage. With these, the rate you sign up for is the rate you’ll have through the fixed-rate period (usually two, three, or five years), so you don’t need to worry about any rises but won’t benefit from any falls. You can read a full comparison of the two in our guide to tracker vs fixed-rate mortgages.
Get matched with a tracker mortgage specialist
Whether you’re sure that you want a tracker mortgage, or you’d like to get more information before making that decision, a broker can help. You’ll want to speak to someone who has access to the whole mortgage market and expertise in tracker mortgages, fixed-rate mortgages, and other types.
We work with numerous brokers who fit the bill, as well as specialists in various other areas that you may need advice on, such as first-time buyer mortgages, bad credit mortgages, and 95% mortgages. To be matched with someone with the skills to help you, just call us on 0808 189 2301 or make an enquiry online.
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