A tracker mortgage is a type of variable mortgage where your monthly repayments can vary. However, it is different to a Standard Variable Rate (SVR) mortgage, as we’ll explain later. Whether you should get a tracker mortgage or a fixed-rate mortgage depends on what you (or your mortgage broker) think will happen to mortgage rates in the coming years. Taking out a tracker mortgage at the right time could save you money, but conversely, it could end up being more expensive than a fixed-rate if the base rate increases during the term. In this guide, we’ll explain how a tracker mortgage works, how they differ from variable (SVR) and fixed-rate mortgages, what the pros and cons are, and whether you should get a tracker mortgage in 2024.
How Does a Tracker Mortgage Work?
To understand how a tracker mortgage works, we first need to understand what the base rate is. The base rate is the interest rate that the Bank of England (BoE) charges commercial banks to borrow money. Commercial banks then loan this money out to customers for an increased rate to make a profit. The BoE increases or decreases the base rate to control inflation and the economy.
A tracker mortgage in the UK follows, or tracks, the Bank of England’s base rate. However, that doesn’t mean the rate you’ll pay will be the same as the base rate – banks need to make a profit, so they add on a certain percentage to the base rate. For example, if the base rate is 5%, a tracker mortgage interest rate might be 5.75%. If the BoE increases or decreases the base rate, your tracker rate will increase or decrease by the same percentage. So in the above example, if the base rate increased to 6%, your tracker mortgage rate would increase to 6.75%.
How Long Are Tracker Mortgages?
Similar to a fixed-rate mortgage, tracker mortgages are typically taken out for 2 to 5 years, however, it is possible to find longer deals. Once your tracker mortgage has ended, you’ll be moved onto your lender’s Standard Variable Rate unless you remortgage.
Will I Have to Pay to Get Out of a Tracker Mortgage Early?
Tracker mortgages tend to have a lower Early Repayment Charge (ERC) than a fixed-rate mortgage, and many deals don’t have an ERC at all.
Tracker Mortgage vs a Variable Mortgage (SVR Mortgage)
The term ‘variable mortgage’ by definition includes any mortgage that doesn’t have a fixed rate. However, it’s most often used as a term for a specific type of mortgage, called a Standard Variable Rate (SVR) mortgage, so for the remainder of this article we’ll refer to an SVR mortgage as a variable mortgage.
Like a tracker mortgage, a variable mortgage is also affected by the base rate. However, the difference is that a lender can change their variable rate by any amount whenever they want, regardless of the base rate. So where a tracker mortgage will only change when the base rate changes and by a specific amount, a variable mortgage could change even if the base rate doesn’t – and by how much is solely decided by the lender. Variable mortgages tend to be the most expensive, as the rates are usually higher than tracker or fixed-rate mortgages. They are also usually the most volatile and therefore provide the least amount of certainty for borrowers. Your lender will usually move you onto their variable rate when you come to the end of a tracker or fixed-rate deal. The general advice, no matter what is happening in the mortgage market, is to remortgage onto a new deal before this happens so you don’t have to pay the higher Standard Variable Rate.
Tracker Mortgage vs a Fixed-rate Mortgage
Where the interest rate for a tracker mortgage can change throughout the term of the deal in line with the base rate, a fixed-rate mortgage is, like the name suggests, fixed. In other words, you lock in a specific interest rate for a set period of time, and that’s exactly what you’ll pay regardless of any changes to the base rate. Fixed-rate mortgages can save you money if the base rate increases, but they can be more expensive than a tracker if the base rate stays the same or decreases during the term. The main benefit of a fixed-rate over a tracker mortgage is that you know exactly how much you’ll pay each month, which makes it easier to budget for and therefore reduces the risk of not being able to keep up with your repayments. Both tracker and fixed-rate mortgages are contract-based deals that you ‘lock into’ for a set period of time, usually 2 to 5 years but sometimes more. With both types of mortgages, you may have to pay an Early Repayment Charge (ERC) if you want to end the deal early, but ERCs are usually lower for tracker mortgages.
What Are the Pros and Cons of a Tracker Mortgage?
Pros of a Tracker Mortgage
- Your monthly payments could decrease if the base rate goes down during your term.
- Depending on market conditions, the initial interest rate may be lower than with a fixed-rate deal.
- They are usually cheaper to get out of than a fixed-rate mortgage if you want to end your plan early.
Cons of a Tracker Mortgage
- Your monthly payments could increase if the base rate rises during your term.
- As your repayments can go up or down, your mortgage may be harder to budget for.
- If you want to switch to a fixed-rate deal once the base rate has risen, you may have to accept a higher interest rate.
Should I Get a Tracker Mortgage in 2024?
As of late 2024, fixed-rate deals are still popular due to the certainty they bring in what is still quite an uncertain time. The mortgage market has been volatile in recent years and it may continue to be so into 2025. However, as fixed-rate mortgages are starting to price in further base rate decreases, a tracker may not be as suitable as it was a year or so ago. However, a tracker mortgage may still be right for you depending on your circumstances and risk tolerance. It’s important to speak to a professional before making any decisions, so book a FREE appointment with one of our friendly advisors to discuss your situation and see what tracker and fixed-rate deals are available to you.
The Bottom Line
The interest rate for a tracker mortgage is set at a specific percentage above the Bank of England’s base rate. If the base rate increases or decreases, a tracker mortgage will increase or decrease accordingly. They are different to Standard Variable Rate mortgages (often referred to simply as variable mortgages) in that the interest rate for a variable mortgage can go up or down at any time and by any amount the lender chooses, regardless of the base rate. They are also different to fixed-rate mortgages, in that a fixed-rate deal secures a specific interest rate throughout the term that cannot be changed by the lender or the base rate. A tracker mortgage can work out cheaper or more expensive than a fixed-rate mortgage depending on whether the base rate increases, decreases or stays the same during the term. But both tracker and fixed-rate mortgages are usually cheaper than Standard Variable Rate mortgages. Which type of mortgage is right for you depends on your situation and your risk tolerance, so speak to a mortgage broker today to discuss your options.
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