What is a Tracker Mortgage?
A tracker mortgage is a mortgage agreement where the interest rate paid by the borrower is directly tied to a predetermined index, typically the Bank of England's (BoE) base rate. Consequently, whenever the base rate fluctuates, the interest rate on the tracker mortgage adjusts accordingly, affecting the borrower's monthly payments. Due to this variability, tracker mortgages are often referred to as 'variable rate' mortgages. The interest rate is typically calculated as the Bank of England (BoE) base rate plus a margin set by the lender.
How does it work?
Tracker mortgages offer lower monthly repayments when interest rates are low but can result in higher repayments when interest rates rise due to fluctuations in the rate. The interest rate on a tracker mortgage is linked to the BoE’s base rate and includes a 'margin' set by the lender. Most tracker mortgages have a minimum rate to prevent rates from falling below a certain level. These mortgages typically last between 1 to 5 years before transitioning to a standard variable rate.
For instance, if the base rate is 3% and the margin is 3%, the interest rate on a tracker mortgage would be 6%. If the base rate rises to 3.5%, the interest rate would increase to 6.5% (3.5% base rate plus 3% margin).
