A tracker mortgage is a type of home loan where the interest rate mirrors the changes in the Bank of England base rate. This can cause repayments to fluctuate throughout the term of the mortgage if the Bank of England is required to raise or lower the base rate.
Advantages of Tracker Mortgages
The main benefit of a tracker mortgage over a fixed-rate alternative is that holders can benefit from any reductions in the BoE base rate. These should lead to an equivalent fall in the interest rate of your tracker mortgage.
Occasionally, a tracker mortgage will become available at a lower interest rate than a fixed-rate alternative from the same lender. This has become less likely, though, thanks to a long-term base rate that shows little sign of changing.
Disadvantages of Tracker Mortgages
A tracker mortgage may not always be the best option when taking out a loan to purchase a home. What are the disadvantages?
Firstly, early redemption penalties could extend beyond the end of the initial discounted period (typically 2-5 years). This means you will incur a sizeable fee if you want to change your mortgage during the ‘early redemption penalty period’ - perhaps as much as six months' worth of repayments.
Another disadvantage is that it is not always easy to anticipate the path of the Bank of England base rate over a number of years. Having remained at a record low of 0.5% since 2009, lenders are offering competitive fixed-rate mortgages expecting that the base rate will not rise.
For those with tracker mortgages, an increase in the base rate will lead to an equal increase in mortgage rates. This makes it more difficult to budget and plan as the interest rate could vary over the lifetime of the mortgage.
As always, we recommend that you seek professional advice if you are unsure which type of mortgage is right for you and that all of the information provided above is for use as an overview only and should not be the basis for your mortgage decision.