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Tracker Rate Mortgages: The advantages and disadvantages

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    There are a few different types of mortgage but generally, they fall into two categories:

    1. Fixed-rate mortgages where the interest rate is guaranteed for a set number of years.
    2. Variable rate mortgages where interest rates fall or rise during the mortgage term.

    UK Tracker Mortgage Rates

    A tracker mortgage rate is a type of variable rate mortgage. If you’re wondering whether this type of mortgage is right for you, read this guide on tracker mortgages and get in touch with a mortgage broker at YesCanDo Money if you would like to learn more about your options.

    What Is A Tracker Mortgage?

    As we mentioned above, a tracker mortgage is a type of variable rate mortgage.

    The interest rate you pay on a tracker mortgage is usually based on the Bank Of England base rate plus a set percentage.

    The current base rate is 4% (as of 2nd February 2023) so if your mortgage lender’s set percentage was 1%, the interest rate on your tracker mortgage would be 5%.

    If the Bank of England base rate goes up, you would have more interest to pay on your loan. If the base rate falls, you would benefit from lower interest on your tracker mortgage and this would reduce your monthly payments.

    Find out which type of mortgage best suits your situation

    How Do Tracker Mortgage Payments Work?

    When you make monthly mortgage payments on a repayment tracker mortgage, part of your money goes to the interest being charged by the lender and the other part goes toward repaying the capital of your loan

    If the Bank of England base rate rises, the monthly payments on your tracker mortgage will increase. This would be in line with the interest rise and not due to changes to your loan capital.

    If the base rate falls, your tracker mortgage would follow which would lead to a reduction in your mortgage payments.

    However, the scale at which your payments rise and fall will depend on the caps and collars set by the lender.

    How do caps and collars affect how tracker mortgages work?

    Some tracker mortgage deals have a ‘cap’. The cap is the maximum interest rate that you could be charged on your loan.

    If the Bank of England’s base rate rises above this, you will only be charged the maximum rate set by your lender so your interest rate won’t rise as high as the base rate. If the Bank of England base rate drops, the interest rate on your tracker mortgage will decrease and you will benefit from lower mortgage payments. But how low your payments fall will depend on the ‘collar’ (minimum interest level) set by your lender.

    In the case that the Bank of England base rate decreases to 0%, you would still have to pay the lender’s minimum interest rate on your loan.

    It’s worth noting that not every lender sets a collar, however, so you might still benefit from a bigger reduction if the base rate does drop dramatically.

    What is a variable rate mortgage

    A variable rate mortgage is similar to a tracker mortgage however with a tracker mortgage you usually get a discount or reduction on the interest rate on a variable rate mortgage you don’t.

    A variable rate mortgage tends to be a ‘poor cousin’ of a tracker mortgage however it does have one advantage you don’t usually get charged early redemption charges by the mortgage lender if you want to leave them while them. It’s worth noting that you will usually need to pay early repayment charges on both a fixed rate mortgage and tracker mortgages.

    Fixed vs Tracker Mortgage: What is the difference?

    We have explained the difference between a tracker mortgage and fixed rate mortgage briefly but let’s go into a little more detail.

    With a fixed-rate mortgage, interest rates won’t rise or fall, despite changes to the base rate. So, while you won’t benefit if external factors cause interest rates to drop, you will still have the security of the same monthly payments if the interest rate rises.

    Tracker rate mortgages are sometimes cheaper than mortgage deals with fixed rates, especially when a lender offers an introductory period with lower interest rates.

    Therefore, you can usually expect lower monthly repayments on your tracker deal during the first few weeks/months of your mortgage. However, when the introductory rate expires, you will usually be charged higher interest rates by your lender. This, combined with any increases to the base rate, can result in higher mortgage repayments on your mortgage.

    Find out which type of mortgage best suits your situation

    Which type of mortgage is best for you?

    Well, if you prefer to know what you will be paying each month, a deal with fixed interest rates could be better. But if your level of income can cover higher payments on your mortgage, and if you want to take advantage of potential interest rate reductions, then you may want to consider mortgages with tracker rates.

    Need advice? Make an appointment with a mortgage broker at YesCanDo Money. We will let you know more about each type of mortgage and will advise you on wether a fixed rate or a tracker rate mortgage might be better for your particular circumstances.

    Our mortgage advisors have years of experience and will be able to advise you whether it is best to consider tracker mortgage rates or fixed mortgage interest rates. This decision becomes even more important when the rates are increasing like they are at present.

    Tracker Rate Mortgage Pros

    Tracker mortgages can be attractive as there are several pros attached. These include:

    Lower payments if the Bank of England rate falls

    If the base rate drops, your mortgage rates will also be reduced. How far your interest rate falls will depend on whether or not your lender has set a collar rate.

    Lower early repayment charge

    If you want to repay your mortgage early, you may be subjected to your lender’s early repayment charges. Early repayment charges are usually higher on fixed rate deals so if you have a tracker mortgage, you should be subjected to a smaller early repayment charge.

    Some tracker mortgages come without an early repayment charge so if you wanted to remortgage onto a mortgage new deal before the end of your mortgage term, you could leave your mortgage early without having to pay a penalty.

    Lower arrangement fees

    When you take out a mortgage, a lender will usually charge you an arrangement fee for setting up your mortgage. The cost of these fees varies significantly but you can usually expect to pay less if you take out a tracker mortgage.

    Tracker Rate Mortgage Cons

    Despite the advantages that tracker mortgages can offer you, there are a few disadvantages too. These include:

    Your monthly repayments can go up with no warning

    As tracker mortgages follow a base rate, there is no guarantee that the mortgage repayments will stay the same. If the base rate increases, so too will your payments. Your tracker mortgage payments can also increase once the introductory rate period of your deal ends if the lender moves you onto a higher tracker rate or their standard variable rate mortgage (SVR).

    You might not benefit if your deal has a collar

    If you choose a deal with a collar, you might not benefit from the reduced base rate if the lender’s minimum rate is higher. You still have the option of moving to a better deal when your current tracker mortgage ends, so if you aren’t happy with the collar rate on your mortgage, you are free to move (without having to pay the penalty charge set by your bank) after the set period of your mortgage term.

    Find out which type of mortgage best suits your situation

    Budgeting could be a problem for you

    It’s easier to budget for fixed-rate mortgages than it is for tracker mortgages, as the monthly payment will always be the same. As tracker mortgages operate at variable rates during the mortgage term, you might run into financial difficulty if you haven’t budgeted for any increases incurred by the base rate or your lender.

    Tracker Rate Mortgage FAQs

    Tracker mortgages are usually taken out for a period between 2-5 years although longer-term tracker mortgages are available. If you want to take out a tracker mortgage for the duration of your mortgage term, you might want to consider a lifetime tracker mortgage.

    If you take out a 2-year tracker mortgage deal, you will be subjected to variable rates of interest for 2 years.

    A 2-year mortgage is for you if you’re looking for a short-term loan, perhaps because you’re in a position where you want to move and resell your house quickly. You then have the option of moving to a fixed-rate deal if you think interest rates are going to rise. However, there are situations where you might want to consider a longer deal, such as a lifetime tracker, and we can discuss the reasons why with you.

    Tracker mortgages are a form of variable rate mortgages but the interest on your monthly mortgage payment is based on the Bank of England’s base rate. With other mortgage rates that are variable, such as mortgage lender’s standard variable rate (SVR) and Discount mortgages, the interest rate is based on the rate set by the lender.

    With interest-only mortgages, you only pay the interest each month but you still have to repay the capital at the loan’s end. Repayment mortgages on the other hand include monthly payments that consist of interest and capital.

    With a tracker mortgage, you pay both the capital and the interest each month.

    How YesCanDo Money Can Help

    If you’re thinking about getting a fixed rate mortgage or a tracker mortgage in the near future, get in touch with our team of mortgage advisors before we see further interest rates rise.

    Whether you’re a first-time buyer, seasoned home mover, or a client looking to remortgage, we can search all available mortgage lenders for the mortgage deal that is right for you.

    If you’re interested in mortgages with a variable tracker rate, we can discuss your options, from 2-year tracker deals to lifetime tracker mortgage deals to let you know which might be better for you.

    Should the interest rate on fixed rate deals be better or comparable to tracker mortgage rates offered by mortgage lenders, we will also let you know about the fixed rate mortgages that may be better for your circumstances. Our mortgage advisers will make sure you pay no early repayment charges on your current mortgage. They will search the whole mortgage market to get you the best fixed rate mortgages with the lowest mortgage repayments.

    But whatever you decide, our team of mortgage brokers is here for you. We will help you get a great mortgage at a tracked or fixed rate period and will support you with every aspect of your mortgage application.

    We have a great team so if you have any questions and for further information about fixed rate and tracker rate mortgages, check out our other mortgage advice guides that go into detail on these subjects and much more besides.

    Contact our FEE-FREE Mortgage Advisers

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    Steve Roberts
    Steve Roberts

    Stephen Roberts MAQ is the founder of YesCanDo Money, one of the UK's largest no-fee mortgage brokers. With over 30 years of mortgage experience, he has advised and helped thousands of first-time buyers buy their first home and home movers buy their dream home. Speak to a mortgage expert today by completing our contact form:

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