Is a tracker mortgage for you?

A tracker mortgage can see borrowers make savings if they time it right, or could see them facing unpredictable bills. Here we look at whether a tracker mortgage is a good idea now and how their interest rates are affected. 

• What is a tracker mortgage?
• Is a tracker mortgage a good idea now?
• Tracker mortgage rates

What is a tracker mortgage?

A tracker mortgage is a variable loan where the interest rate follows the Bank of England’s base rate. That means the amount you pay could change every month – depending on how often the BoE announces an interest rate change. A borrower will not be borrowing at the exact rate the BoE sets, but usually a percentage or two above it.

For example, if a tracker mortgage deal was set at 1% above the base rate – which is 4% - the borrower would be paying 5% interest. If the base rate increased to 4.5%, the tracker’s rate would go to 5.5%.  Likewise, if the base rate went down to 2%, the borrower would pay 3%.

Tracker mortgages lock a borrower in for a set amount of time, usually one to five years, but they can be 10 or even for the lifetime of the mortgage. After the term ends a mortgage holder will be moved onto the lender’s standard variable rate unless they remortgage with another product. 

Some tracker mortgages have ‘collar rates’ which stops the interest rate falling past a certain point. If the base rate falls below a certain level, the tracker won’t follow it all the way.

Is a tracker mortgage a good idea now?

A tracker mortgage could be a good idea now if you think interest rates will peak soon. Tracker mortgages can be advantageous when markets change and interest rates come down because you could end up paying less than if you were tied into a fixed rate deal agreed when rates were higher. However, it can be problematic if interest rates are going up and up as your payments will increase quickly, perhaps faster than your earnings.  

If you think the base rate is likely to drop much lower than the fixed rate deals that are around now you might feel confident taking the risk with a tracker mortgage. Remember that lenders add their own percentage onto a tracker mortgage rate, so you’ll need to factor that into calculations when estimating how much prices will have to drop for a tracker to be better value. 

UK market confidence plunged in Autumn 2022 after the Government announced unfunded tax cuts in its mini-Budget. Panicked lenders hiked interest rates and withdrew hundreds of deals, fearing the Bank of England would raise its base rate considerably. It was common to see fixed rate deals around the 6% mark. But by early 2023, markets had calmed enough (in part because the Government U-turned on many of its shock fiscal announcements), that many fixed rate deals were around the 4% mark. If you were renewing or taking out a first mortgage in September 2022, you could have signed up to a deal much more expensive than what was being offered five months later. If you had a crystal ball, you may have decided to take out a tracker mortgage and weather the storm. But it is risky, as you can never be certain what will happen with the base rate, you can only take an educated guess at best. 

A number of tracker mortgages have ‘collar rates’ imposed on them, which prevents a tracker’s interest rate falling below a certain level. This means that even if the base rate fell to almost nothing, those with a ‘collar rate’ wouldn’t be able to reap as much of the rewards.

Tracker mortgage advantages

• If the base rate is on a downward trajectory mortgage payments could get cheaper and cheaper.
• Usually time-limited so can move on to a different product at the end of the term if it is not working out.
• Early repayment charges can be cheaper than other types of mortgage such as a long term fixed rate. 
• Introductory rates are competitive.
• Can be easier to change mortgages than other products.

Tracker mortgage disadvantages

• Uncertainty about bills makes it harder to budget.
• If a market shock suddenly sees interest rates increase quickly trackers could be more expensive than a fixed rate mortgage
• Usually time-limited so will still need to remortgage at the end of the term.
• ‘Collar rates’ make it harder to make large savings.

Tracker mortgage rates

Tracker mortgage rates depend on a chosen base rate, usually the Bank of England’s. An extra percentage is added on top, which is set by the mortgage lender. To find the best rate, compare deals using our partners at Brighton & Hove.

Estimated monthly mortgage costs

Rates for other trades