GETTING your head around the different types of mortgages can be tricky, so here’s everything you need to know about trackers.
It comes as the Bank of England base rate is sitting at a 15-year high.
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The central bank unexpectedly increased the rate by 0.5 percentage points to 5% on June 22, the sharpest increase since February.
It’s also expected to increase rates further on August 3 – below’s what it means for tracker mortgages.
What is a tracker mortgage?
Tracker mortgages, also known as variable rate tracker mortgages, are linked to the BoE base rate.
It means that, unlike fixed-rate mortgages, your monthly payments can go up or down depending on the wider economy.
The Bank of England reviews the rate roughly eight times a year, meaning the rate can change this many times too.
For example, it’s currently increased the rate 13 times in a row since December 2021 in an attempt to bring down inflation.
If interest rates fall, a tracker means you’ll make lower payments to your lender.
Or if interest rates increase, your monthly payments will increase.
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In comparison, a fixed-rate mortgage means the interest rate on your loan stays the same for the duration of your deal.
The most common fixes are two or five years, but it’s possible to lock in a rate for even longer.
A fix means you’re protected from any imminent rate rises, but you’ll lose money if rates drop during your term.
How does a tracker mortgage work?
Trackers don’t exactly match the interest rates they track, but they’re set at a level just above the base rate.
This percentage above it will depend on the type of deal you get.
For example, if yours is 2% above the base rate, you can expect to pay 7% (5% + 2%) as things stand right now.
If the base rate rose by 0.25 percentage points, your tracker would increase to 7.25%.
Based on a £300,000 mortgage over 25 years, a 0.25 percentage point increase would take your monthly payments from £2,120 to £2,168 – a £48 increase.
Or if the base rate was raised by 0.5 percentage points, your monthly payments would instead rise by £97 to £2,217.
It’s also important to note that some tracker mortgages have an interest rate collar, also known as a floor, which is the minimum rate it can reduce to.
For example, if your deal has a collar of 0.6% and the base rate has dropped to 0.2%, your tracker’s rate would still be set as if the base rate were 0.6%, ie 2.6%.
You should always look out for tracker deals where the collar is set at the initial rate you pay, as it means you wouldn’t benefit from a drop.
You may also be able to find deals with a cap on the maximum the interest rate can increase to.
Either way, as you’re never able to predict mortgage payments in advance, it’s important to have room in your budget for any changes.
What happens when my tracker rate mortgage ends?
Most tracker deals last for a few years, although there are exceptions.
When your tracker rate mortgage ends, you’ll typically be moved over to a standard variable rate (SVR), unless you take action.
SVRs are generally higher than other mortgage deals, so if you’re on one then you’re likely to be paying more than you need to.
This means it’s beneficial to shop around for new mortgage rates beforehand.
You could look to remortgage your property with another tracker mortgage, or you could find a fixed-rate mortgage deal.
A tracker mortgage is usually cheaper than an SVR mortgage and more predictable as the rate can’t just change at the whim of the lender.
