Mortgage Solutions Limited

Tracker variable rate mortgages

A tracker variable rate mortgage offers the option of having a rate which is linked to another rate such as the Bank of England base rate. The tracker variable rate tracks this other rate as it increases or decreases.

Tracker variable rate mortgages usually offer an initial incentive, typically for two or three years. For example, the interest rate payable may be set at a small percentage above the rate being tracked for an incentive period. At the end of the incentive period the rate payable will continue to track the rate to which it is linked but usually at a larger percentage above the rate being tracked.

When the rate which is being tracked increases or decreases, so does your mortgage interest rate and mortgage payments.

For example if the Bank of England base rate (BBR) is 4.75%, then the tracker rate may be offered at BBR plus 1.00% for two years and BBR plus 2.00% for the rest of the mortgage term. The rate you pay will therefore start off at 5.75%. If the BBR moves during the two year period, the rate you pay will move with it, but always at 1.00% above the BBR. So if the BBR increased to 6% after six months then you would pay 7.00%. If the BBR fell to 4% after say one year then you would pay 5.00%.

Generally, the shorter the initial incentive tracker rate mortgage period, the lower the rate you will pay.

More exotic trackers are sometimes available for those with a good knowledge of the financial markets and an appetite for risk, for example tracking Swiss interest rates.

Advantages of a tracker variable rate mortgage

• A tracker rate gives you the certainty of knowing the mortgage rate you pay will move automatically in line with the rate being tracked
• At present tracker rates generally offer an initial incentive rate which is lower than a fixed rate mortgage over the same period
• You benefit quickly from any reduction in the rate being tracked even if the 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 must 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 option 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 rate mortgage

Drawbacks of a tracker variable rate mortgage

• If the rate being tracked increases, your interest rate and monthly mortgage payments will also increase, which can make budgeting more difficult
• Some lenders reserve the right to change the margin by which your rate tracks the other rate being tracked under certain circumstances
• Some base rate trackers come with a ‘collar’.  This means that the rate you pay never falls below a set level.  For example, a base rate tracker of BBR plus 1.00% with a collar at 3.50% means that even if the BBR falls to 2%, you will never pay less than 3.50%
• Early repayment charges are likely to apply for at least the term of the initial incentive tracker period
• There is generally 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 - so there may be a large increase in your monthly repayments

Lifetime tracker mortgage

A lifetime tracker mortgage offers you the option of tracking a rate, often the Bank of England base rate, by a certain percentage for the full term of the mortgage.