All about tracker mortgages

A tracker, unlike a fixed-rate mortgage, has a variable interest rate. This means the amount you will be paying back goes up and down in line with the Bank of England’s base rate. Fixed-rate mortgages are the opposite and will stay exactly the same for a specific period of time.

For fixed-rate mortgages, lenders take into account market conditions, future interest rates and various other factors before locking in the set rate you will pay for the length of the deal, with most common terms lasting between two to five years. This means you are unaffected by any interest rate rises, so your repayment is stable and easy to predict and budget for over the years. The downside, of course, is that if the interest rate drops in the future, you will be left paying a higher rate.

The pros and cons of each are slightly complicated by the higher interest rates and unstable economic environment of the past year. However, the main benefit of a tracker mortgage is if interest rates go down, your repayment goes down. Meanwhile, for fixed-rate mortgages, the main positive is the security of knowing exactly how much you will be repaying no matter what happens with interest rates for the length of time you fix for.

As the mortgage market has become more competitive, the advantage of opting for a tracker isn’t as strong on the face of it as it would’ve been in the autumn of last year. The average interest rates this month for a two-year fixed rate are c4.35%, whereas a two-year tracker is c4.14%[1]. While trackers are currently lower, expectations are that the bank base rate may rise further, which will push up tracker mortgage rates.

Each and every borrower is different, and therefore a one-size-fits-all approach is not appropriate when considering the different methods of repaying a mortgage.

For those borrowers who are able to withstand further increases in monthly outgoings, a base rate tracker mortgage may be the most appropriate product should the base rate continue to rise, combined with the expectation that rates may reduce in the medium to longer term.

Borrowers looking for the stability and security that a fixed-rate offers will take comfort in knowing that they will be able to meet their mortgage repayments, regardless of other external factors. These repayments will be stable for a defined period, and may even be slightly higher today than those offered by a current tracker.