Tracker Mortgages

What are tracker mortgages?

Tracker mortgages are directly linked to the Bank of England’s base rate. The Bank of England has a Monetary Policy Committee (MPC) which meets on the first Thursday of every month to discuss the economy and decide whether the interest rate needs to be higher, lower or remain the same.

Most mortgage lenders offer tracker mortgages which have an interest rate set at a certain amount above the base rate. This will vary between lenders but with base rates at historical lows you are probably seeing deals of around 2-3 per cent above base, depending on the size of your deposit. Before the credit crunch it wasn’t unheard of to get tracker deals which were set at a percentage below base rate but these deals have all dried up now. Indeed, some lenders who had offered these deals ended up with customers who didn’t have to pay any interest whatsoever for a time on their loans.

How do tracker mortgages work?

When the meeting of the Bank of England’s MPC ends they announce what the base rate will be that month. If the base rate increases by 0.25 per cent the interest payments on your mortgage will increase by 0.25 per cent the following month. Likewise, if the base rate is lowered you will benefit from cheaper mortgage repayments.

Tracker mortgages can be for the full term of the mortgage in which case they are known as lifetime trackers. They can all have set terms – usually for two, three or five years. The same lender will often charge different premiums over the base rate depending on your requirements. If you have a larger deposit you can expect to pay a lower premium. A shorter time frame will also generally have a lower premium – so lifetime trackers attract higher premiums. Also some lenders will give you the option of having a lower premium if you opt for a higher arrangement fee.