Could Following the Bank of England Base Rate Work in Your Favour?

When people think about mortgages, most immediately think of fixed rates. You agree an interest rate for two or five years, know what your monthly repayments will be and have some certainty over your household finances.

But there is another option that is often overlooked or misunderstood: the tracker mortgage.

With interest rates continuing to attract attention, tracker mortgages have become an option worth understanding. But how do they actually work, what are the advantages, and could one be suitable for you?

Let’s take a closer look.

1. What exactly is a tracker mortgage?

A tracker mortgage is a type of variable-rate mortgage where the interest rate follows the Bank of England base rate.

Rather than offering you a fixed interest rate for an agreed period, the lender charges a set percentage above the Bank of England base rate.

For example, imagine you take out a tracker mortgage at:

Bank of England base rate + 1%

If the Bank of England base rate is 4%, your mortgage interest rate would be 5%.

If the base rate subsequently falls to 3.75%, your mortgage rate would fall to 4.75%.

However, if the base rate increases to 4.25%, your mortgage rate would increase to 5.25%.

In simple terms, your mortgage rate follows the direction of the base rate, with the lender’s agreed margin added on top.

2. What happens when interest rates change?

This is where tracker mortgages differ from fixed-rate mortgages.

With a tracker, you benefit when the Bank of England reduces interest rates, but you also feel the impact when rates increase.

Let’s use a simple example:

Imagine you have a £200,000 repayment mortgage over 25 years, with a tracker rate of 5% (based on a 4% base rate plus 1%).

Your approximate monthly repayment would be £1,169.

If the base rate changed, your repayments could look something like this:

Bank of England base rate	Your mortgage rate	Approx. monthly payment
3.50%	4.50%	£1,112
3.75%	4.75%	£1,141
4.00%	5.00%	£1,169
4.25%	5.25%	£1,198
4.50%	5.50%	£1,228

Illustrative figures based on a £200,000 repayment mortgage over 25 years. Assumes the rate changes immediately and the remaining term stays the same. Actual lender payment adjustments may differ.

As you can see, relatively small movements in interest rates can make a noticeable difference to monthly repayments.

3. Why would someone choose a tracker mortgage?

There are several reasons why a tracker might be attractive.

Potential to benefit from falling interest rates

If the Bank of England reduces its base rate, your mortgage rate should reduce in line with it, subject to the product terms.

Unlike someone locked into a fixed-rate mortgage, you could benefit from reductions during your tracker period.

Potentially greater flexibility

Some tracker mortgages have no early repayment charges, meaning you may be able to switch to another mortgage deal without paying a penalty.

This can be particularly useful if your circumstances change or you decide that fixing your rate is more appropriate.

However, this is not guaranteed. Some tracker products do have early repayment charges, so the conditions need to be checked carefully.

An alternative to fixing

If you are comfortable with some uncertainty around your monthly repayments, a tracker can provide an alternative to committing to a fixed interest rate.

4. What are the disadvantages?

Tracker mortgages aren’t without their risks.

The biggest consideration is that your repayments can increase.

If inflation remains higher than expected or the Bank of England decides that interest rates need to rise, your mortgage payments will increase accordingly.

This means you need to be comfortable with the possibility of paying more each month than you initially budgeted for.

For anyone whose finances are already stretched, this uncertainty could be a significant concern.

It is also important to check whether the mortgage has a minimum interest rate (sometimes called a tracker floor), as this could limit how much you benefit if the base rate falls.

5. Tracker vs Fixed: What’s the difference?

The main distinction is certainty versus flexibility.

Fixed-rate mortgage	Tracker mortgage
Interest rate remains unchanged during the fixed period	Interest rate follows the base rate
Monthly repayments are predictable	Monthly repayments can increase or decrease
No immediate benefit from base rate reductions	Benefits from base rate reductions
Protected against base rate increases during the fixed period	Exposed to base rate increases
Early repayment charges often apply	Some deals have no early repayment charges

Neither option is automatically the better choice.

A fixed rate may suit someone who values certainty and wants to know exactly what their mortgage will cost each month.

A tracker may appeal to someone who can accommodate fluctuations in repayments and wants the potential benefit of falling interest rates.

6. Who might consider a tracker mortgage?

Tracker mortgages are worth considering in a number of circumstances:

• Borrowers expecting to move: Someone who may sell their property or change their mortgage arrangements in the near future could benefit from a tracker without early repayment charges.
• Borrowers comfortable with fluctuations: If you have sufficient disposable income and savings to absorb potential payment increases, a tracker may be an option.
• Those wanting flexibility: Some trackers allow greater freedom to make overpayments or switch products without an early repayment penalty.
• Borrowers who don’t want to commit to a fixed rate: A tracker may appeal to someone who prefers to retain flexibility rather than lock into a fixed deal.

However, the individual mortgage terms, fees, interest rate and affordability all need to be considered.

7. So, are tracker mortgages worth considering?

With the Bank of England base rate changing over time, tracker mortgages can offer opportunities that fixed-rate mortgages don’t.

But it is important not to make a decision based purely on expectations that interest rates will fall.

Nobody can guarantee where interest rates will be in six months, a year or two years’ time.

A tracker that initially looks attractive could become more expensive if rates rise, while a fixed rate could ultimately prove more expensive if rates fall.

The key is to compare the overall cost, understand the risks and make sure the mortgage is suitable for your circumstances.

How can McDaid Mortgages help?

At McDaid Mortgages, we look beyond simply finding an interest rate.

Whether you’re purchasing your first home, moving house or reviewing an existing mortgage, we can explore the available fixed and tracker options and explain the differences in terms of cost, flexibility and risk.

The right mortgage isn’t necessarily the one with the lowest initial rate. It’s the one that best suits your circumstances, financial commitments and future plans.

If you’re reviewing your mortgage options, get in touch and let’s look at what’s available.

McDaid Mortgages Ltd

Telephone: 07968 155176

Website: www.mcdaidmortgages.co.uk

Your home may be repossessed if you do not keep up repayments on your mortgage.

You may have to pay an early repayment charge to your existing lender if you remortgage.