Tracker mortgages are a type of variable rate mortgage where the interest rate moves in line with the Bank of England’s base rate. You can get mortgages that track base rate for a few years or for the entire life of the loan.
What are the benefits of tracker mortgages?
In the current economic climate where the base rate is 0.5%, tracker mortgages can be very affordable. Depending on how big a percentage of a property’s value you are looking to borrow, you can expect to pay base rate plus 2% to 4% on a tracker mortgage.
Trackers are different to other variable rate mortgages such as discount rate deals and standard variable rate mortgages. With these types of variable rate deal your lender can change the rate you are paying whenever it likes. But with a tracker mortgage, only changes in the base rate will affect your repayments.
< h2> What are the downsides of tracker mortgages?
Tracker mortgages do not provide total rate security. If the base rate were to rise suddenly, so would your interest payments. Although many economists think the base rate is going to remain at 0.5% for the foreseeable future, no-one knows for certain how long it will stay there. So if you are worried about whether you could afford higher repayments, a fixed rate mortgage might be a better option for you.
In the current market, you may also be able to secure fixed rate deals which will cost you the same, or less, than a tracker rate. So it is worth thinking carefully about whether to opt for a fixed or a variable rate mortgage deal.
Most lenders will charge you exit penalties if you leave before the end of a tracker mortgage’s deal period. But there are an increasing number that will let you switch to a new mortgage without paying any fees. So it’s worth shopping around to see if you can get a good rate and the option to quit the tracker deal early with no penalties.
Although most residential mortgages track the Bank of England base rate, some will follow Libor (London Inter Bank Rate) instead. This is the rate at which banks lend to each other and it can vary day to day, so there is more movement in it than the base rate.
A Which? Mortgage Adviser will be able to talk to you about the possible benefits and drawbacks of opting for a Libor mortgage.
Speak to an impartial mortgage adviser
To discuss whether a fixed or variable rate is right for you, speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available lender, and because they’re paid a salary – not a sales commission – you can have confidence that you’ll receive truly independent advice.