What is a tracker mortgage?

A tracker mortgage is a type of variable rate mortgage which "tracks" a base rate – usually the Bank of England’s base rate, although some may follow their own base rate. If you get a tracker mortgage, your mortgage repayments (including the interest you pay on your mortgage) could change every month.

Tracker mortgage vs standard variable rate mortgage - what’s the difference?

The difference between tracker mortgage and a standard variable rate mortgage is if you have a standard variable mortgage, a mortgage lender can set their own variable rate. However, a tracker mortgage normally follows the Bank of England’s base rate – which they don’t control.

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

A fixed rate mortgage’s payments don’t change – at least for the short term. Fixed rate mortgages offer a good value rate for a limited time, so if you need to budget effectively and you want to know how much you’ll be paying every month, they’re ideal.

Your payments also won’t go up throughout the duration of the fixed rate, no matter how high rates go. However, you won’t get reduced mortgage payments if interest payments drop – one of the benefits of tracker mortgages. After the fixed period ends you will be moved onto a standard variable rate mortgage.

How do tracker mortgages work?

Tracker mortgages "follow" the Bank of England’s base rate. This means your mortgage rate will usually be set slightly above this base rate.

For example, if the base rate is 0.75%, and your mortgage offers the base rate plus 1.00%, your rate would be 1.75%. This setup makes your monthly payments variable; they can go up or down depending on changes in the base rate.

If interest rates fall, you’ll make lower payments to your lender. If interest rates rise, your payments will increase. This can be great when rates are low, but it's important to remember that rates can also go up.

One thing to bear in mind is that you may never be able to predict or plan your mortgage payments in advance. It’s important to make sure you can still afford your mortgage repayment if your payments increase.

This is the cost of the flexibility of a tracker mortgage. While you can take advantage of lower interest rates, you need to have good financial planning for any potential increases.

How long can I get a tracker mortgage for?

You can generally get a tracker mortgage for a certain period of time, usually between 1–5 years. Or you can get a lifetime tracker, which will last for as long as your mortgage.

If you get a tracker mortgage for a limited time, when it comes to an end, you’ll usually be moved to the lender’s standard variable rate.This could result in your monthly repayments increasing. This can be a good time to look at other mortgage providers and check what offers are available with your current lender.

You could look to get another tracker mortgage, or you could find a fixed-rate deal which works for you. You may not have to find a new mortgage provider, the lender who originally arranged your tracker mortgage may also have some fixed rate or tracker products suitable for you.

What’s a collar rate and how low can my tracker mortgage payments go?

Some mortgage lenders have a collar rate on their tracker mortgages. This means that your rate can’t go below a certain minimal level.

This helps you predict the lowest possible payment and plan accordingly.

Advantages of getting a tracker mortgage:

• If the Bank of England interest rates drop so will your repayments – notwithstanding collar rates
• If interest rates increase and you want to switch to a fixed-term mortgage, some providers may let you switch without charging you a fee
• Early repayment charges may be more affordable when compared to other types of mortgage

Disadvantages of getting a tracker mortgage:

• If the base rate goes up, your monthly payments can also increase
• Collar rates mean that even if the base rate falls to record lows, your mortgage repayments won’t necessarily reduce to these levels, the minimum amount you pay will be capped
• If you remortgage during the introductory period or you want to repay your mortgage in full, you may be charged a fee.