What is a Tracker Mortgage?
Discover how a tracker mortgage works and how it might suit your financial needs.
A tracker mortgage is a type of home loan where the interest rate is linked to a specific rate, usually the Bank of England’s base rate. This means that your mortgage rate will move up or down in line with changes to the base rate.
How Does a Tracker Mortgage Work?
With a tracker mortgage, your interest rate is set at a fixed percentage above or below the Bank of England base rate. For example, if the base rate is 1% and your tracker mortgage is set at 1% above the base rate, your mortgage rate would be 2%. If the base rate increases to 2%, your mortgage rate would rise to 3%.
This type of mortgage ensures that your payments reflect the current economic conditions, offering potential savings when base rates are low. However, it also means that your payments can increase if the base rate rises.
Length of Tracker Mortgages
Tracker mortgages can be offered for a variety of terms. Some last for a few years (e.g., two to five years), while others can track the base rate for the entire life of the mortgage.
Advantages of Tracker Mortgages
- Potential Savings: If the base rate falls, your interest rate and monthly payments will decrease, potentially saving you money.
- Transparency: Your interest rate is directly linked to a known benchmark (the base rate), making it easy to understand how your rate is determined.
- Flexibility: Some tracker mortgages come without early repayment charges, offering more flexibility if you wish to switch mortgages or repay your loan early.
Disadvantages of Tracker Mortgages
- Variable Payments: Your monthly payments can fluctuate with changes in the base rate, making it harder to budget compared to fixed-rate mortgages.
- Risk of Rate Increases: If the base rate rises, your mortgage payments will increase, which could strain your finances.
- Lack of Predictability: The uncertainty of payment amounts can make long-term financial planning more challenging.
What Happens When the Tracker Period Ends?
When the tracker period of your mortgage ends, if it’s a term tracker, your interest rate will typically revert to the lender’s standard variable rate (SVR). The SVR can be higher than your previous tracker rate, so it’s important to review your mortgage options and possibly remortgage to secure a more favourable rate before the tracker period concludes.
Tracker Mortgages: Pros and Cons
Advantages:
- Monthly payments may decrease if the base rate falls, leading to potential savings.
- Direct correlation with the base rate ensures transparency in how your interest rate is set.
- Some tracker mortgages offer the flexibility of no early repayment charges.
Disadvantages:
- Monthly payments can increase if the base rate rises, impacting your budget.
- Less predictability in payments can complicate financial planning.
- At the end of the tracker period, reverting to the SVR can result in higher payments if a new deal isn’t secured.
Need Further Guidance?
Tracker mortgages can offer benefits in a low-interest-rate environment but come with the risk of rate fluctuations. For personalised advice and to explore the best mortgage options for your situation, contact our expert team at Empreso Private Clients. We are here to help you navigate the mortgage market and find the solution that best fits your financial goals.
