Tracker and variable-rate mortgages

Variable rate and tracker mortgages

Tracker and variable-rate mortgages are linked to the Bank of England base rate. So if the base rate goes up or down, so will your mortgage repayments, depending on the deal you have with your lender. Tracker rates are usually the base rate with an added percentage on top such as a 0.5% base rate plus 1.5%.

The first thing to remember with these linked rates is that they can go higher than they are now. In recent years, the Bank of England base rate has been at a record low, yet this in no way guarantees it will always be at a low rate for the future. In addition, variable-rate and tracker mortgages are usually given initially at a lower rate for a set period only. Once this period finishes, then the rate reverts back to the mortgage lender’s own standard variable rate (SVR), which is higher. In addition, if you wanted to get out of the mortgage deal early, you would normally have to pay a significant fee. Once you’re on the SVR, if and when the base rate changes, your mortgage payments will change with it.

Naturally, if the base interest rate is low, your tracker mortgage means initially you have lower mortgage payments than if you had a fixed-rate mortgage. Again, remember that if the base rate rises, so do your mortgage payments, so budget for possible rate rises when you’re thinking about taking out a tracker or variable-rate mortgage.

Another type of mortgage is a capped mortgage. This tracks the Bank of England base rate but has a guarantee where you will never pay more than a certain rate, no matter how high the base rate actually rises. Also available are discount mortgages. These are linked to the mortgage lender’s SVR and not the Bank of England base rate. They would usually be advertised as, for example, the SVR less 1%.

Deciding what type of mortgage is best for you is one of the first and most important decisions you need to make. Study each option carefully and, wherever possible, get expert help from a mortgage broker or independent financial advisor.

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