Halifax has recently started offering tracker rates for the first time in 4 years, but why?
Unlike fixed rate mortgages where you agree a rate with the lender at the outset, for a defined period of time, a tracker rate moves in relation to the interest rate they are tracking. Typically, a tracker rate will track either the Bank of England base rate or a lenders standard variable rate (SVR). Lenders add a fixed percentage amount (a margin) to the rate to cover their costs and make a profit on the loan.
Trackers are becoming more and more popular amongst borrowers since the fixed rate market has soared. In some cases tracker rates do not include any early redemption charges allowing clients to survey the market over the coming months before possibly jumping onto a fixed rate without being penalised.
With the average 2 year fixed rate now standing at 5.78%, down from 6.47% in November, many prospective homeowners feel the market could reduce further and are reluctant to lock into fixed rates too early. Taking into account Halifax’s current base rate tracker option of 3.5% +0.59% margin, giving a pay rate of 4.09%, it is easy to understand why tracker rates are now more popular.
How long do tracker rates last?
Tracker rates will typically be set for a period of 2 to 5 years before reverting the lenders standard variable rate. It is also possible to secure tracker rate that runs for the entirety of the mortgage term. These rates are referred to as lifetime trackers.
Are there limits on how high or low tracker rates can go?
Thanks to the historic lows in the Bank of England base rate from 2009-2021, most lenders now have a “collar” (or floor) included in the T&C’s stopping a tracker rate from falling below a certain level. Unsurprisingly, it is quite uncommon for there to be any kind of limit or “cap” (or ceiling) on how high the rate could rise.
Advantages of a tracker mortgage
- The initial rate can be more attractive than fixed rate alternatives – this is certainly the case at the present time
- Tracker rates can be found with no early redemption fees, allowing flexibility to overpay, move or transfer to another interest rate
- Should the variable rate you are tracking reduce, so too will your monthly payments
Disadvantages of a tracker mortgage
- Tracker rates are variable therefore offering less certainty than a fixed rate. This makes life far more difficult when trying to plan monthly spending
- If rates rise sharply, so does your monthly payment
- If your rate has a collar, not all rates decreases will be passed on to you and your monthly payment
Is a tracker rate right for you?
In uncertain times a tracker rate could be a good option to allow you to secure a lower rate whilst you survey the market and take stock of your options. A tracker rate is also a viable option if you feel rates will fall lower than the current level. The key though, is to work with a mortgage broker to properly assess the impact on affordability should rates increase. It is also imperative you fully understand the terms and conditions such as collars or floors, early redemption charges, closing administration fees and exactly what interest rate you will be tracking.