Everything you need to know about Tracker Rate Mortgages

In recent years the Tracker Rate mortgage has gone rather out of fashion. Fixed Rate Mortgages have held such low interest rates that there really hasn’t been much of an incentive for anyone to choose a tracker. Why opt for something variable and ‘unknown’ when you could fix a low rate and know exactly where you stand for the next two to five to ten years?

But in recent months (time of writing this is February 2023), we have seen interest rates rise rapidly and we find ourselves now in a very different market to where we were this time last year. As things currently stand the main high street lenders are offering mortgage rates around the 4%-5.5% mark. Whilst this is around 3% higher than a year ago, it is (thankfully) still not as high as some had predicted it would be by now. That said it is still rising and there’s no knowing what the next year could bring.

With all this uncertainty in the market, our old friend the Tracker Rate Mortgage has started to put in an appearance again and for some people, it really could be the sensible option.

What is a Tracker Rate Mortgage?

A Tracker Rate Mortgage is a variable rate mortgage. This means that the interest rate on the loan will fluctuate throughout the mortgage term. Unlike a Standard Variable Rate which is set by an induvial lender (best avoided in the main), a Tracker rate is tied to the Bank of England Base Rate. This is a rate that is not set by individual mortgage lenders and they have no control over whether it goes up or down.

The lender will offer you a tracker rate at a % above or below the Bank of England Base Rate so if that base rate goes up, your rate will increase with it and, conversely, if the base rate goes down, so too will your mortgage rate.

An example of how a Tracker Rate Mortgage works

We love a good example. It can really help to get your head around all this, by imagining a real-life scenario. So lets imagine you are borrowing £200,000 to buy your next property. You want a repayment mortgage on a term of 25 years. If you were to take a fixed rate you may be able to secure an interest rate of say 4.8%. This would give you a monthly payment of roughly £1,145 and, because this is a fixed rate you can be sure that this payment will remain the same until the end of the five year term.

However, during the five years of your term it’s possible that the Base Rate may have gone down and perhaps you could have saved money if you’d been on a tracker rate mortgage.

If we continue with the same example abut use a tracker rate this time, let’s see what happens. Imagine you are borrowing £200,000 on a tracker rate of 0.29% above base rate (this is a typical rate at time of writing this). The current base rate is 4% so your interest rate would be 4.29% giving you a monthly payment of around £1087. Remember the tracker rate is variable so as the base rate changes, so too will your mortgage rate and therefore your monthly payment. If the base rate goes up, your rate (and your monthly payment) will increase. If the base rate goes down, your mortgage rate (and your monthly payment) will decrease.

So how do you know if a tracker rate is right for you?

This is not an easy question to answer and it always comes down to individual circumstances. Essentially you need to make a judgement about whether you would prefer to have the stability and certainly of a fixed rate or if you are willing to take a tracker rate and risk the base rate increasing significantly.

The best advice is to get advice. Find a mortgage broker that you can trust. Make sure they are a ‘whole of market’ advisor so that they are not tied to any specific lenders. Ideally use someone who has been personally recommended to you or, failing that, has seriously good reviews online. Give a few a call and see who takes the time to chat and understand your circumstances. Make sure you are comfortable with their fee structure (remember, you get what you pay for when it comes to mortgage advisors!) and then let them guide you through the whole process.

At Hudson Rose we believe passionately that everyone should get some Income Protection in place (honestly, we can’t stop banging on about it!). We’ve seen first hand the benefit and sense of relief an Income Protection policy can have. We pride ourselves on taking time to get to know our clients and talk them through every aspect of life insurance and income protection. Get in touch and let us help you too.