Everything you need to know about tracker mortgages

Whether you’re looking into buying a house or considering a remortgage, you may have come across the term ‘tracker mortgages’.

A tracker mortgage is a mortgage loan, which tracks the Bank of England’s ‘base rate’ and adds a set percentage. If the base rate increases, your mortgage rate rises accordingly.

Here, we’ll tell you everything you need to know about tracker mortgages – from the pros and cons of tracker mortgages and how often a tracker changes, to interest rate collars and how tracker mortgages differ from other variable mortgages. We’ll also explain how Adjoin Homes’ rent-to-own schemes compare to tracker mortgages.

What is a tracker mortgage?

A tracker mortgage is a type of mortgage loan that tracks a nominated interest rate (usually the Bank of England’s base rate) and adds a set percentage. If the base rate increases, your rate rises along with the increase. If it falls, so does your rate.

Because a set percentage is added, a tracker mortgage rate always sits at a margin above the rate it’s tracking. Introductory offers tend to have lower margins to attract new customers, while longer-term tracker mortgages tend to have larger margins.

If your tracker rate is set for an introductory period, this can be anything from one to five years. But if you’re on a lifetime tracker, the conditions will apply for your entire mortgage term. Usually, there’s a minimum rate below which your interest rate will never drop, but rarely is there an upper limit.

How do tracker mortgages work?

Tracker mortgages track a percentage above another rate. When the rate falls, you benefit from lower payments while if the rate goes up, your monthly mortgage repayments also rise. At present, the best tracker mortgage rate you’ll find is around the 1.7% mark.

As with most types of mortgage loans, you’ll incur early repayment charges if you were to exit your tracker mortgage earlier than planned. Most tracker mortgages will, however, let you make up to 10% overpayments of the mortgage balance each year.

How are tracker and variable mortgages different?

Tracker mortgages and variable mortgages are similar in that they track a nominated rate and add a set percentage. Where they differ is the rate they track.

A tracker mortgage follows the Bank of England’s base rate. Variable rate mortgages, however, follow the Standard Variable Rate (SVR) of the mortgage lender.

How often will a tracker change?

A tracker mortgage is linked to the Bank of England’s base rate, which is decided by the Monetary Policy Committee (MPC). The MPC meets for three and a half days, eight times a year, to decide the official interest rate in the UK.

The rate of a tracker mortgage can therefore change up to eight times a year, however, it’s unlikely to happen that often. The Bank of England’s base rate can sometimes stay the same for years. In 2007, the base rate was 5.75% and gradually decreased to 0.25% by 2016. After a couple more changes, it was then set as 0.1% in 2020—a historic low. At the time of writing, the base rate is now 0.5%.

What is an Interest Rate Collar?

An Interest Rate Collar (collar) is an interest rate risk management strategy that protects a borrower from rising rates and establishes an interest rate floor on declining rates to protect the lender. A collar consists of a cap and a floor and effectively creates a band within which a variable rate can fluctuate.

Usually, tracker mortgages have floor rates, however they rarely have a cap. If they do, the cap limit would protect the borrower from their rate rising above a certain level and stays in place for a fixed period. But as we said, they’re not that common at the moment.

The floor rate on a tracker mortgage means that the rate you pay won’t ever go below a specified rate. If you’re looking at tracker mortgages with floor rates, beware of deals where the collar is set at the initial rate you pay. This means you won’t feel a benefit when the base rate falls.

The pros and cons of tracker mortgages

As with anything, there are pros and cons of tracker mortgages. Some of the advantages include:

• You’ll benefit from falling interest rates: If the rate falls, so do your monthly repayments. You could then choose to overpay your mortgage with the money you save.
• They’re transparent: Tracker rates are linked to the Bank of England’s base rate and they’ll only rise or fall by the same proportion when there’s a change.
• Sometimes there’s a cap: If your tracker mortgage has a cap, your rate can’t rise above that level.

But there are also some cons to tracker mortgages. Some of the disadvantages include:

• You’ll suffer from rising interest rates: If the rate rises, so do your monthly repayments.
• Early repayment charges: If you choose to exit your mortgage deal before your fixed-term period ends, you could face early exit fees.
• Sometimes there’s a collar: If your tracker mortgage has a floor rate, your interest rate won’t fall below that level. So if the Bank of England’s base rate was to fall that far, you won’t feel the benefit.

How Adjoin Homes compares

While there are some advantages to tracker mortgages, you’ll need to go through the traditional house purchase and mortgage approval process to get one. If your salary isn’t quite high enough to buy the house of your dreams in the area of your dreams, you might not get accepted. They also don’t provide you with much flexibility should you decide to move and you’ll likely get hit with early repayment charges if you do.

But with a rent-to-own scheme from Adjoin Homes, you can get in your dream home now. We offer tailored packages and payment plans to suit your circumstances and you can choose to purchase the property or walk away at any point in your agreement and for up to 12 years. You won’t be hit with hefty charges for doing so.

In summary

Tracker mortgages have their pros and cons. But thanks to rising house prices, it isn’t always easier to get approved for one and therefore buy a house in the area of your dreams.

Our rent-to-own schemes provide the solution, letting you purchase a house in the area you want to live in and providing you with flexibility should your circumstances ever change.

With Adjoin Homes, you can get in your dream home now.