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

With interest rates rising, see what that means for different mortgage rate types and what action you should consider

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Home Tracker Mortgages What’s The Difference Between A Tracker And Variable Mortgage?
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Updated: March 18, 2024

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.

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

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 where 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.

How much your rates increase or decrease by, 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 5.25%, the tracker mortgage rate might be 6.25%. If the base rate came down to 5%, the tracker mortgage rate would be 6%.

Standard variable rate mortgages

The standard variable rate (SVR) is simply 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 rises, it doesn’t rise by a set percentage and it can also rise (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 were to increase to 7%, the discounted variable rate would increase to 6%.

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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 at the point when you apply.

Though no one knows for sure what will happen in the future, experts are currently predicting that the base rate could have reached the peak of this current cycle of increases and may now begin to come back down over the next 12 to 18 months.

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

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Comparing rates for tracker and variable-rate mortgages

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

  • Barclays – 8.49%
  • Halifax – 8.49%
  • HSBC – 6.99%
  • NatWest – 7.74%
  • Nationwide – 7.99%

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) and, at the end of this initial period, they will either remortgage or move on to the SVR.

All lenders have different discounted rates, tracker rates, and fixed rates on offer. The rates available to you will partly depend on your circumstance (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. It can also be difficult to know which will save you the most money in the long term. 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 straight away.

Alternatives to consider

The main alternative to variable rate or trackers is fixed-rate mortgages. With these, you’ll lock in your rate at the start of the mortgage term, and you’ll 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 a two-year period) is 5.29%, whereas before the base rate began to rise these rates would have been much lower.

Fixed rates can look quite high at present but they do 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 rate, fixed rate, or discounted variable rate will almost certainly all 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. to move home or to move to a different lender) they might charge an expensive exit fee. So, if you want to make overpayments or might need to exit your mortgage soon, seek advice.

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. It’s much easier to find a broker you trust and make a decision based on their advice.

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 put you in touch 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 0808 189 2301 or enquire online.

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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 Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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