Tracker Mortgages - Advantages & Disadvantages

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Tracker Mortgages - Advantages & Disadvantages

A tracker mortgage is a variable rate mortgage, where the interest is directly linked to the Bank of England base rate. This means that whenever the Bank of England’s base rate changes, the rate on the tracker mortgage should change by the same amount within a set period.

Advantages of a tracker mortgage

• A tracker rate gives you the confidence of knowing the mortgage rate you pay will move automatically in line with the rate being tracked (most commonly with the Bank of England base rate)
• Currently tracker mortgage rates are generally offering an initial incentive rate which is lower than a fixed rate mortgage over the same period
• You benefit from any drop in the rate being tracked even if your mortgage lender delays reducing its standard variable rate to reflect the reduction
• The lender has less discretion to delay passing on rate cuts than with a discount deal or a standard variable rate mortgage. With a base rate tracker mortgage the lender obliged to move your rate in line with the rate being tracked. The lender may however reserve the right to delay changing your mortgage rate when the rate being tracked moves. For example, they may only promise to move your rate within 30 days of a change in the rate being tracked
• Some trackers offer the opportunity of switching to a fixed rate deal with the same lender without having to pay the early repayment charges, which would otherwise apply to the tracker mortgage

Disadvantages of a tracker mortgage

• If the rate being tracked increases, your interest rate and monthly mortgage payments will also increase, which can make budgeting rather complicated
• Under certain circumstances some lenders reserve the right to amend the margin by which your rate tracks the other rate being tracked
• Some trackers mortgages come with a ‘collar’. This means that the rate you pay never falls below a set level.  For example, a base rate tracker of Bank Base Rate plus 1.00% with a collar at 3.50% means that even if the Bank Base Rate falls to 2%, you will never pay less than 3.50%
• You may be liable for early repayment charges for at least the term of the initial incentive tracker period
• There is often an arrangement or booking fee payable for a tracker variable rate mortgage
• After the initial incentive period ends, your rate will normally remain linked to the rate being tracked but at a higher percentage above it, this means that there may be a large increase in your monthly repayments