A tracker mortgage is a type of variable-rate mortgage where the interest rate is linked to an external financial benchmark, typically the Bank of England base rate or another index. The interest rate on a tracker mortgage “tracks” this benchmark rate, meaning it fluctuates in line with changes in the index to which it’s linked. Here’s a detailed look at how tracker mortgages work and their key features:
Key Features of a Tracker Mortgage
- Linked to an Index: The interest rate on a tracker mortgage is usually tied to an external benchmark, such as the Bank of England base rate. For example, a tracker mortgage might be set at the base rate plus a fixed margin (e.g., Base Rate + 1%).
- Variable Interest Rate: Because the mortgage rate tracks an external index, it can fluctuate. If the base rate rises or falls, your interest rate will change accordingly, affecting your monthly payments.
- Transparency: Tracker mortgages are generally transparent about how the interest rate is calculated. You know exactly how much the rate is above the benchmark rate, which helps with budgeting.
- Term Flexibility: Tracker mortgages can have different term lengths, such as 2, 5, or 10 years, or they may be available as lifetime trackers, where the tracker terms apply for the entire mortgage duration.
How a Tracker Mortgage Works
- Application and Approval: You apply for a tracker mortgage with a lender who will assess your financial situation, including creditworthiness and income, to determine your eligibility and terms.
- Setting the Rate: The lender sets the initial tracker rate as a margin above or below the benchmark rate. For example, if the Bank of England base rate is 0.5% and your tracker margin is +1%, your mortgage rate would be 1.5%.
- Rate Adjustments: As the benchmark rate changes, your mortgage rate will adjust accordingly. For instance, if the base rate increases to 0.75%, your rate (in the above example) would increase to 1.75%.
- Monthly Payments: Your monthly payments will fluctuate with changes in the interest rate. You will receive a statement from your lender outlining any changes to your rate and payments.