When you apply for a mortgage or remortgage you need to choose which of the available interest rate products you would like. There are broadly 2 types, interest rates which change and interest rates that stay the same.
Here we provide an overview of tracker rate mortgages, where the interest rate is variable and can change.
What is a tracker mortgage?
With a variable tracker rate mortgage the interest rate that you will pay is linked to a Bank interest rate, this is normally the Bank of England base rate (BEBR).
Unlike fixed-rate mortgages, a tracker rate can change so the amount you pay each month could go up if interest rates rise.
Lenders usually add a percentage rate, or margin to the base rate.
EXAMPLE: BEBR +0.85%
This means that your tracker interest rate will be whatever the Bank of England Base Rate (BEBR) is plus a margin of 0.85%.
How do tracker mortgages work?
Tracker mortgages are a type of variable interest rate mortgage, which means your monthly payments will change with any changes in the Bank of England base rate.
If the base rate changes then your lender will recalculate your monthly payments automatically and will notify you of the new repayment figure.
Remember that your monthly mortgage payments could go up if the Bank of England chooses to raise the base rate.
If you prefer to have more certainty over the cost of the mortgage you might look at a fixed interest rate instead.
Tracker mortgages are very similar to discounted mortgages. The main difference is that the discounted rate is linked to the lenders standard variable rate (SVR) and not the BEBR.
What is a lifetime tracker mortgage?
Many tracker rates only last for a set period of time: 2 years, 3 years, 5 years etc.
Lifetime tracker mortgages follow, or track, a base rate, typically the BEBR, for the lifetime of the loan.
The biggest advantage is that you don’t need to worry about when your interest rate deal with end.
However, it is prudent to occasionally ask your mortgage broker what the current alternative rates are. You maybe better off remortgaging to a new lender.
What are the different types of tracker rate mortgage?
The mortgage lender will normally offer a few different tracker rates to choose from. These will be for different periods of time: 1 year, 2 year, 5 year etc.
The interest rate you will be charged varies according to the product term that you choose.
Lenders will often specify a maximum Loan to Value (LTV) for their tracker rate products. This means that borrowers need to have the correct size deposit to qualify.
EXAMPLE
BEBR + 0.85% for 2 years – Max 90% LTV
In this example you need to have at least 10% deposit or equity to be able to choose the product. If you only had a 5% deposit you could not opt for this rate.
Many lenders offer cheaper rates for lower LTV as their mortgage risk is reduced as the borrowers stake increases.
| LOAN TO VALUE (LTV) | 2 YEAR TRACKER INTEREST RATE |
|---|---|
| 90% | BEBR + 1.0% |
| 80% | BEBR + 0.85% |
| 60% | BEBR + 0.75% |
What happens when the tracker rate ends?
Your chosen rate will last for a specific period of time. Once this ends you will be transferred to the lenders standard variable interest rate (SVR). This is normally higher than the rate you were paying and is to be avoided.
To move away from the SVR over to a more competitive interest rate you have 2 choices:
- Mortgage Product Transfer – Choose a new interest rate from the same lender.
- Remortgage – Choose a new interest rate by moving your mortgage to a new lender.
Your existing lender will write to you a few months before the end of the term and will offer you some new rates to choose from.
This is a good opportunity to go back to your mortgage broker to check whether these are the best possible rates.
Mortgage Early Repayment Charges (ERCs)
Early Repayment Charges are early exit fees that apply during the interest rate product term.
You have to pay ERC’s if you want to leave your current mortgage interest deal before the product end date.
You don’t usually have to pay any ERC’s if you’re currently on your lender’s standard variable rate (SVR).
Learn more about Early Repayment Charges.