A tracker mortgage tracks the Bank of England base rate, so any changes in the base rate are passed on to you and your mortgage deal.
So if you imagine it a bit like a bloodhound, tracking the base rate at a set distance, you won’t be far wrong. Wherever that base rate goes – up or down – your mortgage rate will follow.
We like trackers because a tracker is the most the most transparent variable rate mortgage deal you can get. Unlike a discount rate mortgage, which offers a discount off a lender’s Standard Variable Rate (SVR), the lender of a tracker deal cannot fail to pass on a base rate cut. So you always know exactly where you stand in relation to the base rate, and you can rest safe in the knowledge you will benefit from the cuts as well as the rises.
So a tracker is a good idea if interest rates are predicted to fall, as with a tracker your monthly payments will then fall as well.
But beware of banking on cuts in the base rate. As with any variable rate mortgage, a tracker rate can go up as well as down – and if you can’t afford an increase in your monthly payments, you are putting your home at risk if you opt for a tracker. Borrowers on tight budgets are therefore better off going for a fixed rate, where your payments will be fixed at a set level for a definite period and you always know what your payments will be each month.
A good way to decide whether to go for a fixed rate or a tracker is to look at how high the base rate would have to rise from its present level before you could not afford your payments. If you would struggle with even a tiny rise, a tracker may be too risky an option for you.
Most short-term trackers tie you into the deal with Early Repayment Charges (ERCs) for a set period. This means that, even if the rate rises beyond a level you can afford to pay, you cannot switch to a new mortgage deal during this set period.
However, you can sometimes find good deals on lifetime trackers. While these trackers are likely to be offered at a higher rate than short-term trackers, many do not come with ERCs (or the ERCs only apply for a couple of years). This means you get a competitive rate throughout the lifetime of your mortgage (for example, 25 years if you have a 25 year term), and do not need to fork out huge fees every few years in order to remortgage. But if you do want to remortgage, you can do so without paying any penalties.
Catches in the small print
Do take care to read the small print of your tracker deal carefully. Sometimes lenders apply collars to trackers which mean your rate will not fall below a certain level, no matter how low the base rate falls. Be wary of these deals if the base rate looks like it will fall dramatically.
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