What Is a Tracker Mortgage?
A tracker mortgage is a mortgage with a variable interest rate that moves directly in line with the Bank of England Base Rate. A variable interest rate is a rate that isn’t fixed but changes. Tracker rates are always above the Base Rate by a set margin, such as from 0.5%.
Tracker rates are available on both repayment and interest-only bases. There are many residential and buy-to-let tracker mortgages on the market.
How Do Tracker Mortgages Work?
Tracker mortgages work similarly to a standard variable rate, in that the interest rate you pay can fluctuate. However, with a tracker mortgage, the interest rate will always be a set percentage above the Bank of England Base Rate. On the other hand, an SVR ( standard variable rate), - although also affected by the Base Rate - is only really revised when the lender decides they want to change it.
For example, say that your tracker mortgage has an interest rate of 0.5% above the Bank of England base interest rate. This means that when the Base Rate is 3.5% your mortgage would have an interest rate of 3.5 + 0.5. Your total interest rate in this situation would be 4.0%.
The fact that the interest rate changes relative to the Base Rate means that your interest rate can go up or down. You'll need to make sure that you're prepared in case your interest rate goes up. If the interest rate goes up by an amount that means you may struggle to meet your payments, it’s definitely a good idea to speak to a broker or contact your current lender about your options. Note that when you take out a tracker mortgage, the lender will stress test affordability to help make this kind of situation less likely.
Tracker rates are introductory offers available when you take out a mortgage. This means that you'll have a tracker mortgage for a set number of years before it changes to the lender’s SVR.
How Long Can I Get a Tracker Mortgage For?
A tracker mortgage rate can last between 1 and 5 years depending on your exact deal, but there are more products at 2 and 3 years. After this, you’ll be put onto your lender’s SVR. There are some lifetime tracker mortgages available, which give you a tracker interest rate for the whole duration of the mortgage, but these are rarer and usually intended for later life borrowers.
When you start to approach the end of your introductory tracker rate (up to 6 months before it ends) you can start arranging a remortgage or product transfer to secure a new introductory rate. This can save you money compared to accepting the lender's SVR, but it might mean having to change to a new mortgage provider.
Expert Tip - Nick Mendes, John Charcol. July 2023
Trackers were a great option for anyone who wanted to benefit from rate reductions and then move onto a fixed rate product when rates leveled out. Historically, tracker rates were often cheaper than fixed rates, but now we’re seeing fixed rates come down, and trackers are aligned with the Base Rate which is probably not coming down in the next year.
What’s the Difference Between a Tracker Mortgage and a Fixed Rate Mortgage?
Another popular choice when you take out a mortgage loan is a fixed rate. Just like a tracker mortgage, you'll usually be offered this fixed interest rate for between 2 and 5 years at the start of your mortgage. As the name implies, a fixed rate mortgage has a fixed interest rate that does not change.
Should You Choose a Fixed or Tracker Mortgage?
Whether a fixed or tracker mortgage is more suitable for you will depend on your unique situation. The main difference between them is that fixed rates stay the same for the entire introductory deal period or “fixed term”, while normal tracker rate mortgages are above or below the Bank of England Base Rate by a set margin and move directly in line with it for the whole introductory deal period.
Benefits of a Fixed Rate Mortgage
A fixed rate:
- Offers a clear idea of exactly what your mortgage payments will be each month
- Makes it easy to budget
- Doesn’t increase if the Base Rate goes up
Drawbacks of a Fixed Rate Mortgage
A fixed rate:
- Doesn’t fall if the Base Rate falls
- Almost always comes with ERCs (early repayment charges) which means you have to pay a fee if you remortgage or pay off the mortgage before your fixed-rate period ends
Benefits of a Tracker Rate Mortgage
A tracker rate:
- Gives you the opportunity to benefit from lower interest payments while the Base Rate is low or when it falls
- Often comes with no ERCs, which means you can remortgage before your introductory deal ends if the Base Rate looks like it will rise
Drawbacks of a Tracker Rate Mortgage
A tracker rate:
- Will increase whenever the Bank of England base rate increases which will increase your interest payments
What About Trackers with ERCs vs Trackers Without ERCs?
Some trackers have ERCs and some don’t. ERCs are fees you have to pay if you leave your mortgage before your introductory deal ends.
Here’s what you need to know:
- Trackers with ERCs usually have slightly cheaper rates than trackers without ERCs
- Trackers without ERCs may have slightly more expensive rates, but they give you the freedom to switch to a new, cheaper product while you’re still on your introductory deal should the Bank of England Base Rate rise
Other Variable Rate Mortgages
- Lifetime tracker mortgage - this is where you’re on a tracker rate for the entire mortgage term, not just for an initial introductory deal period
- Discount rate mortgage – this is a type of mortgage where the interest rate sits below the lender’s SVR (standard variable rate) by a set margin and fluctuates in line with it
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Process for Purchase/Remortgage
1. Meeting with Advisers and Mortgage Research
When you phone us, you can either arrange a phone appointment with your adviser or a face-to-face meeting – whatever suits you. Your adviser will ask you some questions and, once they have all the information they need, they’ll go away and find the best mortgage for your circumstances and needs. They’ll also arrange a follow up call to present you with what they’ve found. It may require more than one conversation to gather all the right information, depending on where you are in your property search.
2. Decision in Principle
Once you’re happy with their recommendation, they’ll go about securing your DIP (Decision in Principle) - which is basically a promise from the lender that they’ll loan you money on the condition that the information you’ve provided is correct and subject to a valuation of the property.
3. Offer on Property/Proceed with Remortgaging
After you’ve secured a DIP (Decision in Principle), you’ll be in a great position to make an offer on a property or move forward with remortgaging.
4. Pre-Application and Submission
Following the acceptance of your offer on a property or the decision to move forward with remortgaging, we’ll send you some information which explains all the documents we need to submit to the lender. You’ll be assigned a client relationship manager who’ll check and submit certified copies of your documents; they’ll liaise with both you and the lender. Your adviser will then submit the fully packaged mortgage application.
5. Lender Underwriting and Valuation
The lender will underwrite your application; this basically means they’ll verify the information you’ve provided and review all your documents for themselves. They’ll also instruct a valuation for their purposes on the property to make sure there are no significant problems with it.
6. Mortgage Offer
If the lender is happy with everything they’ve found, they’ll send you a mortgage offer. They’ll also send us a copy.
After you’ve accepted your mortgage offer, you’ll go through the legal part of the process, known as conveyancing. This is where the solicitors/conveyancers draw up contracts and organise the actual, legal purchase of the property or the remortgaging process. If you’re purchasing, you’ll also need to arrange buildings insurance at this stage, making sure it’s in place from exchange.
8. Exchange and Completion
If you’re buying a property, your conveyancer/solicitor will exchange contracts with the seller’s conveyancer/solicitor. It’s at this point that you would put down your deposit and be legally bound to the property. The purchase will complete when the money is transferred on an agreed-upon date.
If you’re remortgaging, then there’ll be no exchange of contracts, however legal work will be required as you’re switching lenders. Your conveyancer/solicitor will instead set a date to draw down the funds and pay off your existing lender(s) once the mortgage offer is released.
Tracker Mortgage FAQs
What Are Standard Variable Rates?
- An SVR or standard variable rate is a rate each lender sets themselves
- Lenders may use the Bank of England’s Base Rate as a guide but don’t have to directly follow its fluctuations
- Although SVRs are variable rates, you wouldn’t necessarily take out an SVR mortgage as SVRs are often more expensive than other rates
- Your lender’s SVR is the rate you’re transferred onto when your introductory deal ends
- Your introductory deal is the rate you sign on with, such as a 2 year tracker rate at 1.5% with an overall 10 year mortgage term
- You typically remortgage onto another introductory deal with a new lender when you’re about to go onto your existing lender’s SVR
- You should start the remortgage process up to 6 months before your introductory deal ends
How Does a Variable Rate Mortgage Rate Work?
A variable mortgage rate “varies”. It moves up and down, depending on the Bank of England Base Rate or market rates.
“Variable rate” is an umbrella term for trackers, lifetime trackers, discount rates and SVRs (standard variable rates). You wouldn’t actually take out a product called a “variable rate mortgage”, but you might take out a tracker or discount mortgage which are types of variable rate mortgages.
Unless you’re on a lifetime tracker, you’ll have an introductory deal that will end after a certain period of time. Your introductory deal will be a fixed, tracker, or discount rate. When this rate ends you’ll be transferred onto your lender’s SVR. You would start to remortgage onto a new product up to 6 months before this happens. If your mortgage has no ERCs – as is the case with many tracker mortgages – then you’ll be able to remortgage whenever you want, most significantly during your introductory deal period.
What Are Discount Variable Rate Mortgages?
Discount mortgages are another type of variable mortgage. You might get offered a discount mortgage as an introductory offer instead of a tracker or fixed rate. If you choose a discount mortgage, your interest rate will be a set percentage below the lender's SVR. This means that if the lender's interest rate is 4.5% and you have a 1% discount, your interest rate would be 3.5%.
Lenders are free to set their own SVR, so it's difficult to predict how much the interest rate could increase. However, Base Rate tracker mortgages will always change relative to the Bank of England's Base Rate which can also be difficult to predict. You should consult a broker to compare whether discount rates or tracker rate mortgages will offer you better value for money and security. While a discount rate might be lower at first, it could increase more.
What Is Currently the Cheapest Tracker Mortgage Rate?
You can check the best tracker rates currently on the market using our free tool above. To find out more about the interest rates on tracker mortgages that you could get, contact us today on 0330 433 2927. The exact interest rate or Base Rate tracker mortgage you could be offered will depend on several factors such as your deposit size, your credit history and more. Our expert brokers can help you find the best rates currently available for your situation.
Are Tracker Mortgages Cheaper?
Tracker mortgages can help you save money compared to other mortgages, but they are not always cheaper, particularly as the interest rate can increase. Tracker mortgage rates are usually lower than a lender's SVR, which is why a tracker mortgage will be offered as an introductory deal. However, you might find that a tracker mortgage rate could be higher or lower than a fixed rate. Plus, the variable nature of a tracker mortgage can make it hard to know how much your mortgage payments will be each month.
Can I Get a Lifetime Tracker Mortgage?
Whether you qualify for a lifetime tracker mortgage will depend on your situation. There are still lifetime tracker mortgages on the market, but they’re not as popular nowadays because the rates tend to be higher than normal tracker mortgages with a set introductory period, such as 2 years. If you want to have a tracker mortgage for longer than your initial term, you could look at remortgaging to get a new introductory offer.
What Are the Best Variable Mortgage Rates?
The Bank of England Base Rate and each lender’s SVR will determine what the best variable rates are at any given time. Use our comparison tool above to look at rates currently available. You should speak to a broker if you want advice on the best deal for your specific situation. Call us on 0330 433 2927 or send us an enquiry.