What is a Tracker Rate Mortgage?
When you apply for a mortgage or remortgage you need to choose which of the available interest rate products you would like.
There are broadly 2 types:
- interest rates which change (variable) and
- interest rates that stay the same (fixed).
A tracker rate is a variable interest rate which ‘tracks’, or follows, the Bank of England base rate.
How do tracker mortgages work?
A tracker rate mortgage is a type of variable rate mortgage, which means that the interest rate you pay can go up or down in line with the Bank of England’s (BoE) base rate. Tracker rates are often linked to the BoE’s base rate over an initial period, usually between two and five years.
Unlike fixed-rate mortgages, a tracker rate can change so the amount you pay each month could go up if interest rates rise.
Lenders usually add a percentage rate, or margin to the base rate.
EXAMPLE
BEBR +0.95%
This means that your tracker interest rate will be whatever the Bank of England Base Rate (BEBR) is plus a margin of 0.95%.
If the base rate changes then your lender will recalculate your monthly payments automatically and will notify you of the new repayment figure.
Some tracker rates may have a collar, which means there is a limit to how high or low your interest rate can go – for example, it might be capped at 3% above or below the BoE base rate.
Most lenders will offer a portability option, where you have the opportunity to keep your tracker mortgage if you move house. This may be beneficial if it’s a really good deal, or to avoid exit fees.
What is a lifetime tracker mortgage?
A lifetime tracker mortgage is a type of mortgage that tracks the Bank of England’s (BoE) base rate for the entire term of the mortgage, rather than just for an introductory period.
This means that your monthly repayments could go up or down in line with the BoE base rate over the chosen mortgage term.
If you are expecting interest rates to go up in the near future, a tracker mortgage may not be the best option as your monthly payments could go up quickly.
One of the biggest advantages is that you don’t need to worry about when your interest rate deal will end.
However, it is prudent to occasionally ask your mortgage broker what the current alternative rates are. You maybe better off remortgaging to a new lender.
Can you make overpayments?
A mortgage overpayment is classed as any additional payment you make above your usual monthly payment. Overpayments can either be a single one-off amount or a regular overpayment made each month for example.
Every lender sets their own rules but many do now allow overpayments of upto 10% pa without incurring any early repayment charges.
If this is important to you then it’s wise to ask your broker to clarify what limits there may be for overpayments.
You will always be allowed to make an additional payment of any size towards your mortgage. However, this may incur charges so you should check beforehand.
Certain professional mortgages will allow overpayments up to 20% pa.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
What happens when the tracker deal ends?
When the tracker rate period ends, you will usually be moved onto the lender’s standard variable rate (SVR). This is the rate that the lender can charge customers at any time, and it is often much higher than the rates offered to new customers.
Your tracker rate product will end on a specific date, check your paperwork to see when this is.
Your existing mortgage company will write to you a few months before this date to offer you some new rates to choose from.
At this point you will have 3 options:
DO NOTHING!
We definitely don’t recommend this one! If you don’t respond to the letter then your lender will transfer your mortgage over to their Standard Variable Interest Rate (SVR). This is normally quite a bit higher than the rate you were paying and is to be avoided.
PRODUCT TRANSFER
Choose one of your lender’s new interest rates and stay with them. This is the simplest option. See how we can help with mortgage product transfers.
REMORTGAGE
Transfer your whole mortgage to a new lender and select one of their products. You may find our Guide to Remortgaging useful.
Each time a tracker rate period ends you will need to decide what to do to avoid being overcharged. If you find this time consuming simply let your mortgage broker sort it out for you.
Mortgage Early Repayment Charges (ERCs)
Early Repayment Charges, or ERC’s, are exit fees that apply during the initial tracker rate product term.
You will have to pay ERC’s if you want to leave your current mortgage interest deal before the product end date, or make overpayments in excess of what is permitted.
The amount you will have to pay will depend on your mortgage lender, but it is typically between 2% and 5% of the total amount repaid.
Once you have moved over to your lender’s standard variable rate there are rarely any ERC’s to pay.
You will find more useful information in our Guide to Early Repayment Charges.
Arrangement Fees
Tracker rate deals, like fixed rates, can have an up-front arrangement fee.
Some lenders will allow you to add this to the mortgage instead of paying it from your own money.
Although this seems very generous of them, be aware that you will be paying extra interest for ‘borrowing’ the product fee for the term of your mortgage.
You will find more useful information in our Guide to mortgage fees.
FAQ
Frequently Asked Questions
What does LTV mean?
LTV is loan to value. It is the ratio, expressed as a percentage, of your mortgage when compared to the property value. Check out our LTV calculator.
Are tracker rate mortgages portable?
Most tracker rate products offer the option to port, or transfer, the mortgage rate over to a new property. You will need to stay with the same lender to do this.
Are fixed rates popular?
Yes, fixed rates are the most popular choice for over half of mortgage borrowers each year.
What is a key facts illustration?
When a mortgage adviser recommends a mortgage, they must give you a key facts illustration (KFI) document before you apply. This is a mortgage quotation which details the costs, rates, APRC and fees for the mortgage.
Should I get a lifetime tracker mortgage?
We would first suggest speaking with an independent mortgage adviser who will be able to recommend the most suitable mortgage for you.
Can I get an interest-only tracker mortgage?
Yes, there are quite a few lenders who will offer this for purchases, remortgages and buy to let.
