There are many types of mortgage available to buyers and making sense of what type suits your situation best can be tricky. Here we explore what a tracker mortgage actually is, how it is different from other types of mortgage and whether it is the best option for you.
What is a tracker mortgage?
A tracker mortgage has a variable interest rate – the rate changes dependent on an economic indicator – usually the Bank of England’s base rate. The base rate moves up and down as a result of changes in the economy, for example when the economy is strong the rate is raised to encourage saving, but when the economy is weaker the rate goes down to encourage spending to boost the economy.
With a tracker mortgage, if the base rate goes up, so will your mortgage payments and likewise, if it goes down, so will your payments – the tracker mortgage “tracks” the base rate.
The base rate is currently at a very low level, meaning tracker mortgages appear to be the cheaper option, however, with this type of mortgage you should always consider if you could afford higher repayments if the base rate did rise – and this could happen at any time. Fortunately, some tracker mortgages are capped, to protect you from large increases – but check this with your provider.
How do I choose a tracker mortgage?
Tracker mortgages vary from lender to lender – most often they are tied to the base rates, but not always. A mortgage broker could be a good idea – they can search through deals to find you the best one, and online mortgage brokers can search through thousands of deals.
What are my other options?
The other most common mortgage type is a fixed rate mortgage. A fixed rate mortgage gives you a fixed interest rate for an agreed period, whereas the tracker rate is variable.
The major decision-making question is really: can you afford to take the risk of increased mortgage repayments?
The chances of tracker rates going up is low – the base rate has stayed low for some time, however, if they did increase and you would struggle to find the extra cash then a fixed rate may be the way to go, to ensure you are better able to budget around a set monthly repayment. With interest rates so low at the moment, it may be a good idea to take advantage of those with a fixed rate mortgage – as a tracker mortgage offers you no guarantees.
There is one more big benefit to tracker mortgages though – a lot of them allow you to make unlimited overpayments, so with a positive financial change of circumstances you can pay off extra on your mortgage, clearing the debt sooner.
Another option is a variable rate mortgage, which follow other types of rate such as the Standard Variable Rate or Discounted Variable Rate – which are set by your lender and can be moved up and down as they wish, usually resulting in higher rates for the customer. You will usually be moved on to one of these types after your initial mortgage term, but always look to switch your mortgage to a better deal before this happens.
If you currently have a mortgage deal and are looking for a better one, whether that is a new tracker or fixed rate mortgage, bear in mind you may be subject to an Early Repayment Charge if you switch your mortgage before your initial term is up, which can run into the £1000s. Make sure you check your terms before you switch.