Continuing our series of posts on mortgages, today we’ll be discussing tracker mortgages.
I covered fixed rate mortgages already, now it’s time to track.
Tracker mortgages are a popular product and has benefits over other types of borrowing. But is it right for you?
Let’s find out!
What is a tracker mortgage?
A tracker mortgage is similar to a variable rate mortgage where the interest you pay revolves around the base rate.
That base rate is usually the Bank of England (BoE) base rate.
Where a tracker differs is how it’s structured. It is usually the BoE base rate +1% or similar depending on the deal you get.
For example, if the BoE base rate is 5% and your tracker is +1%, you’ll pay 6%.
Not all tracker mortgages are full points, some can be quarter, half or more. It all depends on the product you choose.
How does a tracker mortgage work?
When you buy a tracker mortgage, you’ll usually commit to a specific percentage. It can be anything from .25% up to 2% or more.
As in the example above, you don’t pay the BoE base rate but you do follow it. You’ll pay the base rate plus a percentage.
Once you commit that percentage to memory, you’ll be able to quickly assess how any rises or falls in rates will affect you.
If the BoE rate increases from 5% to 5.5%, you know that if you’re paying +1%, you’ll pay 6.5%.
The tracking part of a tracker mortgage can be permanent or temporary depending on the one you buy.
At the time of writing, both types of mortgages are freely available.
The permanent tracker mortgage will follow the BoE base rate plus the percentage until your mortgage is fully paid off.
The fixed tracker mortgage will track the BoE rate for a set period before automatically switching you to your lender’s standard variable rate mortgage.
Both types of mortgages will have a period similar to a fix, where you’ll pay an early repayment penalty. That varies by product and lender though.
What are tracker mortgage collars and caps?
If you’re shopping around for a tracker mortgage, you’ll often hear the term collar and cap.
The collar is a minimum interest rate you’ll pay. For example, If the collar rate is set to 1%, no matter what happens to interest rates, the minimum you’ll pay is 1%. Even if the base rate falls below that.
The cap rate is the opposite. It’s an effective maximum interest rate you’ll pay regardless of what happens in the market.
Collars and caps usually come at a cost but can provide reassurance that you’ll be able to afford your mortgage.
It’s up to you whether that’s a price worth paying or not.
Pros and cons of tracker mortgages
Tracker mortgages have upsides and downsides.
Pros of a tracker mortgage:
Relatively low rates – A tracker mortgage typically attracts lower rates than fixed rate mortgages.
Follows the BoE base rate – When the base rate is low, your rate will be low.
Flexible borrowing – Not all mortgages will have lock-in periods with early repayment penalties, giving you flexibility to borrow wherever you like.
Rates can be capped – Some trackers can be capped so there’s a maximum rate you’ll pay.
Cons of a tracker mortgage:
Less certainty – A tracker will follow the BoE base rate wherever it goes, up or down.
Caps can add expense – Some options will charge a little more for the certainty of a rate cap.
Collars – If we ever get back to very low rates, your tracker mortgage may not give you the full benefit.
Tracker mortgages – Yes, or no?
Tracker mortgages have definite benefits but also some downsides.
If you want a cheap rate and don’t mind the fluctuation, they can be a good idea. If you’re borrowing in a falling market, they can be a good idea.
If you’re looking for certainty in your monthly mortgage outgoings, a tracker mortgage may not be for you.
