Tracker Mortgages Explained

What Is a Tracker Mortgage?

A tracker mortgage is a type of variable-rate mortgage that follows, or "tracks," an external interest rate, typically the Bank of England's base rate. This means your monthly repayments can go up or down depending on what happens to that base rate. Unlike standard variable rate (SVR) mortgages, which can change at a lender's discretion, a tracker mortgage directly follows the base rate plus a fixed percentage.

How Do Tracker Mortgages Work?

Tracker mortgages work by linking your interest rate to a benchmark rate, usually the Bank of England base rate. If the base rate rises, your mortgage repayments will go up. If it falls, your repayments will decrease.

• Example: If your tracker mortgage is set at "Base rate + 1%" and the base rate is 4%, your mortgage rate would be 5%. If the base rate drops to 3.5%, your mortgage rate will fall to 4.5% and so on.

Most tracker mortgages have an introductory period of 2, 3, or 5 years, after which you’ll be moved onto the lender’s SVR unless you switch to a new deal. Some tracker mortgages last for the entire mortgage term – these are called lifetime tracker mortgages.

How Long Can You Have a Tracker Mortgage For?

Tracker mortgages usually come with an initial deal period, which commonly lasts for:

• 2 years – a short-term deal that gives flexibility but requires you to find a new mortgage after it ends.

• 5 years – a longer-term option that provides stability while still tracking the base rate.

• Lifetime tracker – a mortgage that follows the base rate for the entire term, avoiding the need to remortgage unless you choose to switch.

Once your tracker deal ends, you’ll usually move onto the lender’s SVR, which tends to be higher. Many borrowers remortgage at this point to secure the most competitive rates available at that point. 

Tracker Vs. Fixed-Rate Mortgages

The key difference between a tracker and fixed-rate is predictability. With a fixed-rate mortgage, your interest rate stays the same for a set period, so your repayments remain unchanged. This makes budgeting easier.

With a tracker mortgage, your repayments can fluctuate based on the Bank of England base rate, meaning they can go up or down. This offers the potential for savings when interest rates fall but also carries the risk of higher costs if rates rise.

What Are the Pros and Cons?

Tracker mortgages can be an attractive alternative to fixed-rate mortgages, particularly when the base rate is low, but carry more risk if rates start to rise. Here’s what to consider. 

Why They’re Great

• Potential savings: If interest rates fall, your monthly repayments will decrease.

• Transparency: The rate follows a publicly available base rate, making it easy to understand how changes will affect your mortgage.

• Flexibility: Some tracker mortgages do not charge early repayment fees, so you can overpay or switch mortgages without penalties.

What to Look Out For

• Unpredictable repayments: Your mortgage payments can rise if interest rates increase.

• Not ideal for tight budgets: If your finances rely on fixed expenses, the uncertainty of a tracker mortgage can be risky.

• SVR risk: When the tracker period ends, you may be moved to an expensive SVR if you don’t remortgage.

What Is a Collar Rate?

A collar rate is the minimum interest rate your mortgage can drop to, even if the base rate falls lower.

• Example: If you have a tracker mortgage at "Base rate + 1%" with a collar rate of 2%, and the base rate drops to 0.5%, your mortgage won’t go below 2%, even though mathematically it should be 1.5%.

Lenders add collar rates to prevent their rates from becoming too low and reducing their profits. Not all tracker mortgages have a collar rate, so it’s worth checking the terms before committing.

What Is a Lifetime Tracker Mortgage?

A lifetime tracker mortgage follows the base rate for the full length of your mortgage term rather than for just a few years. This means you won’t need to switch deals or remortgage unless you want to.

• Pros: No need to remortgage, long-term rate tracking, and possible savings if rates stay low.

• Cons: Your rate can increase at any time, and there’s no option to lock in a fixed-rate deal for security.

What Happens at the End of a Tracker Mortgage Term?

When your tracker mortgage deal comes to an end, you’ll usually be moved onto your lender’s standard variable rate (SVR), which is often higher. At this point, you have a few options:

• Remortgage to another tracker mortgage: If you want to continue benefiting from rate fluctuations.

• Switch to a fixed-rate mortgage: If you prefer stability and want to lock in your repayments.

• Stay on the SVR: This is rarely the best option, as SVRs tend to be expensive.

Most borrowers remortgage to a new deal before their tracker period ends to avoid being placed on the lender’s SVR.