It is fair to say that mortgage deals have never been under so much scrutiny as they are right now.
When the Bank of England (BoE) interest rate rises rapidly, as it has been recently, the repercussions for all non-fixed-rate mortgage repayments can be huge, and cause a lot of financial stress for homeowners.
Note: At December 2021, the BoE base rate was 0.1%. Since then, it has risen 13 times and, at the time of writing in June 2023, it is 5%.
Conversely, when the BoE interest rate is low, mortgage rates linked to that rate can be very favourable for homeowners with a variable interest rate mortgage or a tracker mortgage.
In this article, our expert team of mortgage advisers at PIL Southampton put the spotlight on tracker mortgages; what they’re all about, their pros and cons and who they are most suitable for.
A tracker mortgage is a type of variable rate mortgage. It goes up and down with the Bank of England base rate so they can be a popular choice, especially when interest rates are low.
They are also popular with younger borrowers – 18-24 year olds are twice as likely to go for the risk of fluctuating interest rates on their mortgage repayments, compared to all other age groups.
A tracker mortgage tracks, or follows, the BoE base rate. It doesn’t match the BoE rate. It is usually set one per cent above the BoE base rate, and they move at the same time, whether up or down.
So, when the BoE base rate is 5%, your mortgage repayment will be 6%.
Some tracker mortgages are capped, meaning that they won’t rise above a certain rate even if the BoE continues to rise – although, like with a fixed-rate mortgage, this security comes with a higher interest rate.
Tracker mortgages with the lowest introductory rates sometimes have what is known as a ‘collar’. The collar sets a minimum rate so that, if the base rate falls below your introductory collar rate, you will not benefit from lower repayments. For example, if your tracker mortgage deal has an introductory rate collar of 2%, and the BoE rate falls to 0.5%, you would still pay 2% interest.
A tracker mortgage is very different to a fixed-rate mortgage. A fixed-rate mortgage is helpful for budgeting, as you are locking in your interest rate for generally two, three or five years and know exactly where you stand with your mortgage payments over this time period.
However, you pay a premium for this guaranteed stability, which means that fixed rates are usually higher than variable rates.
The difference between a variable rate mortgage and a tracker mortgage is more subtle. They both fluctuate depending on external factors. A tracker mortgage rate moves with the BoE rate, whereas a variable rate mortgage follows the lender’s standard variable rate (SVR) which can be affected by other market factors.
A tracker mortgage often has a lower interest rate than a variable rate mortgage.
This graph gives a clear ‘at a glance’ overview of how typical interest rates for SVR, tracker and fixed-rate mortgages have compared over the past five years.
The most common length of a tracker mortgage is two years, however you can also get three year, five year, 10 year deals or even a tracker that covers the full term of your mortgage, known as a lifetime mortgage.
Most lenders have a maximum mortgage term of 35 or 40 years but you would have to be a long way off retirement to get approved for a longer term than the more standard 25 year mortgage term.
A lifetime tracker mortgage usually has a significantly larger margin, i.e. 3.5%, between the BoE rate and the mortgage rate.
When the BoE interest rate is low, your mortgage rate will be relatively low. When the BoE rate is high, your mortgage payment will be high. When the BoE is stable, your mortgage rate will be stable.
Throughout 2013-2015, the BoE rate remained unchanged at 0.5%. So, it was like having a fixed-rate mortgage without paying the higher rate that comes with the guaranteed stability of a fixed-rate mortgage. However, this just happened to be the case during 2013-1015 – it could have changed at any time which would have meant your mortgage repayment would have changed too.
The key point is that your tracker interest rate can fluctuate.
An advantage of a tracker mortgage is that your lender’s tracker rate is likely to be lower than their SVR, and below their fixed rate.
Another advantage of a tracker mortgage is that, often, they don’t have early repayment charges or, if they do, they tend to be lower than fixed-rate mortgages’ charges, which makes it most cost-effective to move house or remortgage if you choose to.
Whether a tracker mortgage is right for you depends on how important it is to you and your budgeting to know where you stand with your mortgage payments.
Of course, tracker mortgages are most attractive when BoE interest rates are low and, right now (June 2023) they are at a 14-year high.
If you are feeling financially vulnerable with the current cost of living crisis, and would find any increase to your mortgage payment a stretch too far, then it is prudent to choose a fixed-rate mortgage over a tracker mortgage.
However, if you have some wriggle room with your finances, or you are planning to move within the next two years and therefore don’t want to be tied to a fixed-rate mortgage, then a tracker mortgage could be the right option for you.
Our specialist team has vast experience with all types of mortgage deals, their ins and outs and pros and cons.
We can help you to navigate your path through the full range of options, working out the best deal to suit you, your individual circumstances and goals.
Our friendly, knowledgeable mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.