With a tracker mortgage, the rate of interest the borrower pays is linked to the Bank of England’s (BoE) base rate of interest. So whenever the base rate changes, so does the tracker’s interest rate and the borrower’s monthly repayment. For those reasons, tracker mortgages are known as ‘variable rate’ mortgages.
When interest rates are low, the borrower’s monthly repayment may be less than it would be on a different type of mortgage, such as a fixed-rate or standard variable rate mortgage. But when interest rates are high, the reverse is true. And as the rate is likely to vary, the borrower can never be sure exactly what their monthly repayment is going to be.
Although the rate of interest on a tracker mortgage is linked the BoE base rate, the actual interest rate charged on the mortgage will be determined by the lender and will usually be higher than the base rate. So if the base rate is 0.5%, the interest rate on a tracker mortgage will be 0.5%, plus whatever rate of interest the lender charges. If, for example, the lender charged an additional 2% interest, the actual rate of interest on the mortgage would be 2.5%.
Although some tracker mortgages run for the life of the loan, most last for less than that — between one year and five years is not untypical.
Once the tracker arrangement finishes, most lenders will switch the mortgage to a standard variable rate of interest.
