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Golden Rock Mortgage Solutions are experts in providing tracker & variable rate mortgage advice.

When it comes to choosing a mortgage, homeowners have a variety of options, each with its own set of advantages and risks. Two popular types are tracker and variable rate mortgages, both of which offer interest rates that can fluctuate over time as apposed to a fixed or a guaranteed rate. These mortgage types can be appealing, especially when rates are low, but they also come with potential uncertainties.

What is a Variable Rate Mortgage?

variable rate mortgage is a type of home loan where the interest rate is not fixed. Instead, it can change over time, typically in line with broader market interest rates or the lender’s own rate adjustments. There are different types of variable rate mortgages, but they all share this core feature of variability.

Standard Variable Rate (SVR):

·        This is the default rate that most mortgage providers set for borrowers who have finished an initial fixed-rate period.

·        It is often higher than other mortgage rates because it doesn’t offer any discounts or ties to external rates.

·        The lender has complete discretion to adjust the SVR up or down at any time, so borrowers with an SVR mortgage may face unpredictable rate changes.

Discount Variable Rate:

Some variable rate mortgages offer a discount off the SVR for a set period, typically two to five years. This discount can make monthly payments lower initially.

Like SVR mortgages, however, they are also subject to change based on lender decisions, meaning the discounted rate could still increase.

What is a Tracker Mortgage?

Tracker mortgage is a type of variable rate mortgage, but with a key distinction: its interest rate “tracks” an external rate, usually the Bank of England base rate. Unlike SVR mortgages, where the lender has control, the interest rate on a tracker mortgage will increase or decrease directly in line with changes in the base rate.

How the Tracker Mortgages works:

Tracker mortgages follow the base rate, plus a fixed margin. For instance, if the base rate is 1%, a tracker mortgage may charge a rate of 1.5% (base rate + 0.5%). When the base rate changes, the tracker mortgage adjusts automatically.

·        This link to the base rate makes tracker mortgages more predictable than standard variable rate mortgages, as changes are transparent and depend on a publicly known rate rather than the lender’s discretion.

Types of Tracker Mortgages:

·        Lifetime Trackers which remain in place for the duration of the mortgage term. As long as the base rate does not rise drastically, this can be beneficial for long-term savings.

·        Short-term Trackers: These track the base rate for an initial period, often two to five years, after which they switch to the lender’s SVR or another agreed-upon rate.

Key Benefits of Tracker and Variable Rate Mortgages

Potential Cost Savings:

·        In low-interest-rate environments, both tracker and variable rate mortgages can lead to lower monthly payments than fixed-rate mortgages, where borrowers pay a set rate for the loan term.

·        For tracker mortgages, especially, homeowners can often benefit from lower rates if the base rate remains stable or decreases.

No Early Repayment Charges (in some cases):

·        Some variable rate mortgages, particularly those on the SVR, may allow homeowners to repay the mortgage early without facing extra fees.

·        This flexibility can be appealing for those who expect to increase their repayments or pay off the mortgage before the end of the term.

Potential to Refinance Easily:

·        In favourable interest rate environments, tracker and variable rate mortgages offer the flexibility to refinance or switch to a fixed rate if rates start to rise.

Risks and Considerations

Rate Increases:

·        The main risk with variable and tracker mortgages is that monthly payments can rise if interest rates go up. Tracker mortgages are especially vulnerable to changes in the base rate, meaning any increase by the central bank will immediately affect the homeowner’s payments.

·        For SVR mortgages, the lender can adjust rates based on their own assessments, sometimes leading to unexpected increases.

Financial Uncertainty:

·        Homeowners with tight budgets may find it difficult to manage potential fluctuations in their monthly payments. While tracker and variable rate mortgages can start affordably, they are inherently more uncertain than fixed-rate loans.

·        Even a small rate increase can significantly impact monthly payments, which could strain finances for households on a tight budget.

No Benefit if Base Rate Drops Below Zero:

·        In most tracker mortgages, there is a floor rate, meaning the interest rate cannot go below a certain level (often zero or close to zero). If the base rate were to drop below this floor, the borrower wouldn’t benefit from further reductions.

Deciding Between a Tracker and Variable Rate Mortgage

Choosing between a tracker and a variable rate mortgage depends on your financial goals, tolerance for risk, and expectations for future interest rates. Here are some factors to consider:

Financial Flexibility:

If you have enough flexibility in your budget to absorb potential rate increases, a variable or tracker mortgage could be advantageous. However, if your budget is tight, the unpredictability of these mortgages may be too risky.

Interest Rate Trends:

If you expect interest rates to remain low or decrease, a tracker mortgage might be appealing due to its direct link to the base rate. But if rates are expected to rise, a fixed-rate mortgage might be a safer choice.

Long-term vs. Short-term Goals:

Tracker mortgages can be good for short-term gains in low-rate environment but may not offer the stability that some homeowners seek for the long haul.

Conclusion

Tracker and variable rate mortgages offer homeowners an opportunity to benefit from low-interest rates, but they come with the risk of rate fluctuations. Tracker mortgages are more predictable as they follow an external rate like the Bank of England’s base rate, while standard variable rate mortgages are controlled directly by the lender, adding an additional layer of unpredictability.

For homeowners comfortable with a degree of risk, these mortgages can offer cost savings, flexibility, and the potential to pay off the mortgage early without penalty. However, careful consideration is essential, as both types of mortgages require the homeowner to be prepared for potential rate changes and their impact on monthly payments.

Golden Rock Solutions can explain the strengths and weakness and in line with your budget with whole of market advice. Make and appointment or use the  contact page for more info