Interest rate type
The interest rate of a tracker directly follows the Bank of England base rate
Lenders can change their standard variable rate (SVR) regardless of changes to the Bank of England base rate, although most broadly follow it. Base rate tracker mortgages bypass this by mirroring exactly any changes to the base rate, whereas normal variable-rate mortgages follow the SVR.
Interest is charged at a set percentage – typically between 1% and 2% – above the base rate for the duration of the mortgage or until you switch product or lender. Unlike most other mortgages, trackers don’t revert to the SVR at any point during the life of the loan, unless it’s stated the tracker will only run for a set period at the outset.
Types of tracker
Trackers offer some security as the rate is guaranteed never to exceed the base rate by more than a fixed margin. But payments will probably fluctuate so they may not be suited to those on a strict budget.
As with standard rates, however, tracker rates can be fixed, discounted, stepped, flexible, capped and so on, so are adaptable to individual needs. The rate simply follows the base rate rather than the SVR.
Fixed tracker: The rate will be fixed for a period of time – usually between one and five years. When the initial period is over, the mortgage reverts to a tracker.
Discount tracker: Discounts or stepped discounts that follow the base rate can be built into the start of the mortgage term, again for a set period.
Capped tracker: Your mortgage rate follows the base rate as with a normal tracker but with the security of a cap to prevent it rising above a set level.
With a tracker, you benefit instantly from any drop in the base rate, which means you can work out immediately what your pay rate will be as soon as the Bank of England announces it. If your mortgage never reverts to your lender’s SVR your rate will always be competitive with other products.
Also, the difference between the tracker rate and the base rate is usually a lot smaller than the margin between SVRs and the base rate. And the lender can’t change this, so in some ways this is a fairer system.
If interest rates fluctuate, the amount of your repayments will too – and a rise in rates will obviously see them go up. This can make budgeting difficult so if you can’t afford more than a certain amount each month you may not want to take this risk, unless you’re certain rates won’t rise significantly.
Double-check in your lender’s small print that your rate can’t rise. For example, some lenders guarantee that the pay rate will not rise over 1% above the base rate, but may include opt-out clauses that in ‘exceptional circumstances’ they can waive that guarantee.
The situation varies between lenders but early repayment charges may be levied if you pay off your mortgage early or switch product or lender before the end of the initial period.
LIBOR mortgages work in exactly the same way as base rate trackers but mirror a different interest rate – the London Inter Bank Offered Rate – the rate at which banks offer to lend money to one another in the wholesale money markets in the City of London. Historically, this rate has been lower than the base rate – but as with any financial product, past performance is no indication of future trends.
Need to know
- The rate of a base rate tracker directly follows changes in the Bank of England base rate
- The pay rate is typically 1% to 2% above the base rate
- Usually, trackers never revert to the lender’s SVR, often higher than tracker rates
- Products can be fixed, discounted or capped
- You benefit from any base rate falls but are exposed to the risk of your pay rate rising if the base rate increases
Information source: Mortgage advisor & Home Buyer publication