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A tracker mortgage is a type of variable rate that tracks the movement of another rate.

The rate most typically followed is the Bank of England Base Rate. Depending on the product it can follow both above, and below, at a set margin.

As the rate is variable and out of your control it is possible that you may suffer from higher payments when the rates increase, and benefit from lower payments when rates fall.

Tracker mortgages can last for anything from 1 year to the lifetime of the mortgage term. Once the agreed period ends, you will in most circumstances be transferred to the lender’s Standard Variable Rate (SVR).

LIBOR rate

LIBOR rate mortgages track an underlying interest rate. The rate tracked is the London Inter-Bank Offered Rate which is the rate at which Banks lend to one another in the money markets.

The London Inter-Bank Offered Rate is reset every 3 months and so a mortgage tracking this rate is unlikely to change more often than every three months.

The LIBOR rate can fluctuate by a wide margin over a relatively short period of time and so cautious borrowers should avoid exposure to this kind of scheme.

This kind of mortgage is for some a true reflection of market rates and conditions and the rates can drop significantly when the market is depressed.  

Tracker mortgage with a collar rate:

Some lenders choose to put a collar rate on to their tracker mortgages. This essentially means that the lender will set a limit ensuring the rate you pay does not go below this level, regardless of what the base rate does.

Advantages of a tracker rate mortgage:

  • If interest rates fall, so will your monthly payments
  • Depending on your provider you may be allowed to make over payments without incurring any penalties
  • Tracker rates tend to have lower interest rates and arrangement fees than other products

Disadvantages of a tracker rate mortgage:

  • If interest rates rise, so will your monthly payments
  • If the product you choose has a collar and rates fall below this, you will not benefit
  • When the agreed time is over you will automatically be transferred to another rate which could mean higher monthly payments

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