What is a tracker rate mortgage?

A tracker mortgage is a type of variable rate mortgage: their interest rates can go up and down, they usually have no early repayment fees.

A tracker rate mortgage follows the bank of England base rate. Tracker rate mortgages do not match the bank of England base rate exactly but rather they are the basis on which a margin is placed e.g England base rate plus 1.5% = tracker rate.

You can get a tracker rate mortgage for 1- 5 years or a lifetime tracker rate mortgage which will last the whole term of your mortgage. In most cases a mortgage lender will offer a tracker rate mortgage as an introductory offer for the first 3-5 years of the mortgage after which the interest rate will switch to a more expensive standard variable rate or another tracker rate with a higher margin

Tracker rate mortgages can have a positive or negative margin. This means they can be lower or higher than the base rate which they follow. Tracker mortgages which have a negative margin may also come with a collar rate which is a minimum rate to which the mortgage lender will allow the interest rate on your mortgage to fall.

Advantages of a tracker rate mortgage

Tracker mortgages are good if interest rates fall as these would reduce your monthly repayments.

Arrangement fees for a tracker rate mortgage tend to be quite low.

Most mortgage lenders will offer a switch and fix feature which essentially allows you to switch to a fixed rate mortgage in their mortgage product suite if the tracker rate goes up to a level you cant cope with. They will allow you to switch at no cost to you.

Disadvantages of a tracker rate mortgage

If interest rates rise you could find yourself in a position where you can’t afford your monthly mortgage repayments.

Due to how favourable tracker rate mortgages are they will usually have high costs to switch from. E.g the early repayment fees

Tracker rate mortgages with collar rates will not allow you to fully benefit if interest rates fall

Tracker mortgages might not allow you to overpay on the mortgage as well.This means they will prevent you from benefitting in any interest charge savings overpayment might provide you.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.