What’s the Difference Between a Tracker and Variable Mortgage?

When you’re applying for a mortgage or remortgaging, there are several different rate types to choose between, and this decision will partly determine how much you’ll pay each month. The right choice could save you thousands of pounds over the full mortgage term.

No rate’s right for everyone, so it’s a matter of knowing the different rate types and how they work so you can decide which is best for you. Here, we’ll explain the difference between variable rate mortgages and tracker mortgages.

We’ll cover the following topics…

What’s the difference between a tracker and a variable rate mortgage?

These two mortgage types belong under the same umbrella. A variable rate mortgage is a home loan in which the interest rate can rise or fall at any point during the term, while a tracker mortgage is a specific type of variable mortgage agreement.

The amount by which your rates increase or decrease, and when, depends on which type of variable rate mortgage you have.

Tracker mortgages

These mortgages track the Bank of England base rate, i.e. the mortgage interest rate will always be a set percentage above the base rate. For example, if the base rate were 5%, the tracker mortgage rate might be 6%. If the base rate came down to 4.75%, the tracker mortgage rate would be 5.75%.

Standard variable rate mortgages

The standard variable rate (SVR) is the rate the lender has set as their standard, which isn’t necessarily linked to anything. Though the SVR tends to rise when the Bank of England base rate increases, it doesn’t rise by a set percentage, and it can also increase (or fall) at any other time based on other factors.

Discounted variable rate mortgages

These mortgages increase and decrease in line with the lender’s SVR but offer a discount at a set percentage. For example, if the lender’s SVR were 6.5%, the discounted variable rate might be 5.5%. If the lender’s SVR increased to 7%, the discounted variable rate would increase to 6%.

Which is the better option?

There’s no “best” mortgage type, as they all have advantages and disadvantages, but it is worth considering the economic environment and base rate position when you apply.

If the Bank of England base rate were to fall, mortgage rates would also fall. Standard and discounted variable rates could fall by more percentage points than tracker rates.

Comparing rates for tracker and variable-rate mortgages

At the moment, the SVRs of some major lenders are as follows:

• Barclays – 7.74%
• Halifax – 7.49%
• HSBC – 6.49%
• NatWest – 6.99%
• Nationwide – 6.74%

It’s worth noting that a lender’s SVR is almost always the highest rate they charge. New customers typically sign up for a lower rate for an initial incentive period (either a discounted rate, tracker rate, or fixed rate). At the end of this initial period, they will either remortgage or move on to the SVR.

All lenders offer different discounted rates, tracker rates, and fixed rates. The rates available will partly depend on your circumstances (i.e. deposit size, loan amount, credit history). They will also depend on whether you choose a two-year, three-year, or five-year incentive period.

Comparing all these rates can be overwhelming and time-consuming. Knowing which will save you the most money in the long term can also be challenging. That’s where a broker can help. They will:

• Compare rates from every lender (if they have whole of market access)
• Help you understand the advantages and disadvantages of different rate types
• Advise on whether it’s best to lock in a two-year, three-year, or five-year incentive period based on their market knowledge
• Explain other mortgage features to look for, like capped rates
• Advise on ways to secure a lower rate, such as increasing your deposit amount

If you’re interested in finding out more about the type of mortgage that may suit you best, get in touch, and we’ll arrange for a broker we work with to contact you immediately.

Alternatives to consider

The main alternative to variable rates or trackers is fixed-rate mortgages. With these, you’ll lock in your rate at the start of the mortgage term and repay at that rate for a set period (usually two, three, or five years). After that, you can remortgage or move on to the lender’s SVR.

Fixed rates are also related to the Bank of England base rate. So, the average fixed rate available now (for two years) is 5.09%, whereas before the base rate began to rise, these rates would have been much lower.

Fixed rates can look relatively high, but they give peace of mind and allow you to budget for the same repayment amount each month.

Nobody knows for sure what will happen with interest rates in the future, particularly in the long term, and they may fall before the end of your fixed-rate mortgage. That would leave you locked into a higher rate.

Drawbacks of mortgage incentives

A tracker, fixed, or discounted variable rate will almost certainly be lower than the lender’s SVR. However, that doesn’t always mean you’re better off switching away from an SVR mortgage.

For the incentive period of your mortgage, there may be restrictions and additional fees if you want to make overpayments. Or, if you want to exit your mortgage (e.g., move home or move to a different lender), they might charge an expensive exit fee. So, seek advice if you want to make overpayments or might need to exit your mortgage soon.

Speak to a broker experienced in tracker and variable mortgages

Mortgage rates and rate types are complex, and you’re not expected to learn all the intricacies yourself. Finding a broker you trust and deciding based on their advice is much easier.

If you’d like to speak to an experienced broker who understands the market and what’s likely to happen with rates in the future, we can connect you with someone. We’ll take a few details about your situation and match you with a specialist with experience in cases like yours. To get started, call us on 0330 818 7026 or enquire online.