The Return of the Tracker Mortgage

November 9, 2022

It is no longer a given that a fixed-rate mortgage is the go-to option when taking out, or renewing, your mortgage. With many high street lenders currently offering fixed rate mortgages between 5.5% – 6%, and tracker mortgage options starting at 3-4%, many are asking, is this the return of the tracker mortgage? 

Tracker Mortgages are Nothing New

It seems to be a forgotten fact that as recently as 2009 tracker mortgages were the more popular choice for homeowners, so this product isn’t an unknown entity. However, before making any decision, you should be educated about the different types of mortgages and understand how a tracker rate works. You must also be aware of the risk of open-ended costs, clear about your capacity to withstand rate increases, and conscious of your feelings towards unpredictable monthly outgoings. 

Let’s start by breaking down the options:

Fixed-Rate Mortgages

A fixed-rate mortgage entails the rate of interest you pay being fixed for a certain number of years, usually two, three, five or ten. Your interest rate will not change during the initial fixed period. When the fixed rate ends, you begin paying your lender’s standard variable rate.

Tracker Rate Mortgages

Tracker mortgage products have a benchmark – usually the Bank of England Base Rate (BEBR) – on top of which there will be an additional interest charge. The payable rate will be whatever the benchmark is at any given time, plus the additional amount, which is set by your lender. For example, a tracker product of BEBR + 0.69% will have a current, payable rate of 3.69%. Tracker rates can therefore go up or down over time, in line with changes to the benchmark rate. The tracker will also apply for a set amount of time, such as two, three or five years, before reverting to the lender’s standard variable rate. 

 

Discounted Variable Rate:

discounted variable product entails having a discount from the lender’s standard variable rate for a set amount of time. For example, you could have a two-year discount of 2%, so if the lender’s standard variable rate is currently 6%, your payable rate is 4%. This product is similar to a tracker in that in can go up or down over time, although in line with changes to the lender’s standard variable rate, rather than the BEBR.

Important Facts

A fixed rate cannot be altered during the initial fixed-interest period. This means should you fix a rate of 5.5% now for five years, but interest rates begin to fall again within that time, you won’t benefit from any reduction in prevailing rates, although you also won’t be at risk from rates increasing during that time.

The reverse is true for a tracker/ variable product. A borrower on a tracker rate will benefit from any reduction to the BEBR as soon as it occurs, but they’ll also absorb any increases immediately as well. With many tracker products currently 3-4%, however, the question is how likely is it that the BEBR will increase by enough to have made it more costly than fixing a rate of 6% for two years from outset? In that context, a two-year tracker seems like it might offer good value for money.

 

Key Considerations When Making Your Decision

Now that we’ve laid out the basic facts of Tracker Mortgages vs Fixed Mortgages vs Discounted Variable Rate there are personal things you need to consider before making any decisions. 

 

How much can you afford?

It helps to identify the maximum sum you can afford on a monthly basis before you’d start to enter financial difficulty. If it seems as though you could withstand an increase of several percentage points that may come with a tracker product and still be able to make ends meet, then that may mean you’re more comfortable with the idea of taking a tracker product knowing you have the capacity to absorb any increases.

How easily can you switch if you're not happy?

All fixed rate mortgages will have early repayment charges for the duration of the initial fixed rate. This means if you repay the mortgage in full two years in to a five-year fixed rate, you’re likely to be looking at hefty penalties for doing so. On the other hand, many tracker and variable products are free of early repayment penalties. This leaves you free to switch to something else mid-way through the product term, pay off large sums, or pay the mortgage entirely if desired. Some tracker/ variable products will still have early repayment charges, so always read the key facts illustration carefully.

 

What will give you peace of mind?

The truth is we can’t predict what interest rates will do in the years to come. You may look back with hindsight in two years’ time and be satisfied that you paid less money on a tracker rate compared to a fixed rate. But if not knowing what your mortgage repayments will look like from one month to the next is going to be something you lose sleep over, if it’s been a source of stress throughout, will it have been worth it? 

 

The Right Choice for You

In the right circumstances, a tracker mortgage may well be good value for money. On the other hand, despite being higher than they have been for some time, fixed rates could still be more appropriate for the more risk averse. If you’ve identified the repayments are within budget, and will remain so for the foreseeable, a fixed rate still offers peace of mind, and a level of certainty which other products do not. 

The most important thing to remember is that the right decision is the one that works best for you. What your best friend or brother chooses, might not be the choice you want to make as your circumstances are unique to you. If you educate yourself and ask for guidance from a qualified independent mortgage or financial advisor if necessary, you can make a well thought out choice and feel confident in whatever you decide.

 

by Cain Stennett