How to find the best tracker mortgage

Summary 

• Interest rates for tracker mortgages are linked to the Bank of England's base rate.

• Tracker mortgages can have lower initial interest rates compared to fixed-rate mortgages.

• Tracker mortgages are suitable for those comfortable with fluctuating payments.

• Unbiased can connect you to a qualified mortgage broker who can help you find the right tracker mortgage for your unique situation.

What is a tracker mortgage?

A tracker mortgage is a type of home loan where the interest rate you pay is linked to the Bank of England (BoE) base rate.

Unlike fixed-rate mortgages, where the interest rate remains constant for a set period, tracker mortgages fluctuate in line with the base rate.

This means your monthly payments can go up or down depending on changes in the base rate.

One of the main reasons why people opt for tracker mortgages is the potential for lower initial interest rates compared to fixed-rate mortgages

Additionally, when the base rate is low, your repayments can be significantly lower. However, the key consideration is that if the base rate increases, so will your mortgage payments.

What fees are associated with a tracker mortgage? 

Tracker mortgages typically come with several fees, similar to other types of mortgages. These can include arrangement fees, early repayment charges, and exit fees. 

While arrangement fees for the best tracker mortgages can sometimes be lower than those for fixed-rate mortgages, this isn't always the case. 

Early repayment (or redemption) charges are incurred if you want to end the deal early. This charge might be a fixed fee, a percentage of the original loan, a percentage of the balance still owed, or a percentage of the amount you’ve already paid.

An exit fee might also be charged to close out the mortgage paperwork. 

It's crucial to compare the total cost of the mortgage, including fees, to determine which option is more cost-effective for your situation.

How does a tracker mortgage work?

A tracker mortgage follows the BoE’s base rate, which is currently 5.25%. If the base rate changes, your mortgage interest rate will change by the same amount.

For example, if your tracker mortgage is set at the base rate plus 1%, and the base rate is 5.25%, your mortgage rate would be 6.25%.

If the base rate rises to 5.5%, your mortgage rate will increase to 6.5%. However, if the BEBR fell to 5%, your rate would decrease to 6%.

Tracker mortgages can differ in how closely they track the base rate and how long they do so. Common durations for tracker mortgages are two, three, five, or even 10 years.

Once the tracker period ends, most tracker mortgages revert to the lender's standard variable rate (SVR), which is typically higher.

It's important to review your mortgage options before this happens to avoid rate increases.

Learn more: variable-rate or fixed-rate mortgage: which one should I choose? 

What are the best tracker mortgages?

Based on data from Forbes and TotallyMoney, the table below illustrates some of the best tracker mortgage options currently available.

These rates are based on the purchase of a £300,000 property and a £175,000 tracker mortgage, with an initial period of two years:  

Please note the below is correct at the time of publication (July 2024).

Should I get a tracker mortgage?

Tracker mortgages are ideal for borrowers comfortable with fluctuations in their monthly payments. 

If you anticipate that the BoE's base rate will remain stable or decrease, a tracker mortgage could save you money compared to a fixed-rate mortgage.

They are also suitable for those with the financial flexibility to accommodate potential increases in their mortgage payments.

If your budget is tight, where rising interest rates may present a problem, a fixed-rate mortgage might be worth considering instead.

What happens when my tracker mortgage ends?

When your tracker mortgage ends, it usually switches to the lender's SVR. The SVR is often higher than the initial tracker rate, increasing your monthly payments.

To avoid this, you can remortgage to another tracker, fixed-rate, or other type of mortgage before the end of your current deal.

If you want to end your tracker mortgage early, be aware of any early repayment charges that might apply.

These fees can be significant, so it's essential to check your mortgage agreement and calculate if the potential savings from switching outweigh the cost of the fees.

What are the pros and cons of a tracker mortgage?

The advantages and disadvantages of a tracker mortgage are detailed below.

Pros:

• You can potentially access lower initial interest rates compared to fixed-rate mortgages.

• They can be beneficial during periods of low base rates, resulting in lower monthly payments.

• You have flexibility if the base rate remains stable or decreases.

Cons:

• Your monthly payments can increase if the base rate rises.

• You’ll struggle with uncertainty and unpredictability in long-term financial planning.

• There may be early repayment charges if you wish to switch to another mortgage type.

Seek expert financial advice

Choosing the right mortgage is a significant financial decision, and tracker mortgages offer a unique blend of flexibility and potential savings.

Understanding your tracker mortgage's fees, duration, and terms is crucial to deciding if a tracker mortgage aligns with your financial goals and risk tolerance. 

While tracker mortgages can offer lower initial rates and savings during periods of low base rates, they also carry the risk of increasing payments if the base rate rises.

By carefully weighing these factors, you can make an informed decision that supports your long-term financial well-being.

Let Unbiased match you with a qualified mortgage broker to help you find the right tracker mortgage options for your needs.