Credit Building > Are tracker mortgages a good idea?

Are tracker mortgages a good idea?

Wollit Team3 minute read · Updated 29th June 2024

Tracker mortgages can be a good option for some homebuyers in the UK, but they also come with risks.

Here's a closer look at how tracker mortgages work, why your credit score matters when getting one, and whether they might be right for you.

What is a tracker mortgage?

A tracker mortgage is a type of variable rate mortgage where the interest rate "tracks" the Bank of England base rate, plus a set margin.

For example, if the base rate is 0.5% and the tracker margin is 2%, your mortgage rate would be 2.5%.

Here is what else you need to know about them:

The rate moves up or down depending on the Bank of England base rate;
Rates are usually lower than fixed rates initially. This is because fixed rates provide more clarity for you but more risk for the bank. However, the rate can also increase afterwards if the base rate goes up.
Rates are available for fixed terms (for example, 2-5 years) or as lifetime trackers;
After the fixed term, the rate usually reverts to the lender's “standard variable rate” (SVR).

What are the pros and cons of tracker mortgages?

Tracker mortgages come with some pretty significant advantages:

They tend to have lower initial rates compared to fixed mortgages;
The payments decrease if the base rate falls;
They also give you the flexibility to switch to a fixed rate later without early repayment charges on some deals.

However, they also come with some big downsides:

Your payments can increase if the base rate rises (as it has happened since 2022);
It’s difficult to budget when you don’t know how much you’ll have to pay
Some lenders have "collar rates" that prevent the rate falling below a certain level;
And you may need to pay early repayment charges if you switch during the tracker period.

So when are tracker mortgages a good idea?

Tracker mortgages may be a good idea for you if:

You think interest rates are likely to remain low or fall;
You can afford higher payments if rates rise;
You don't mind the uncertainty of variable payments;
And you may move or remortgage before the tracker period ends.

This means that tracker mortgages are a bad idea if:

You need to know how much you’ll have to pay;
You think interest rates are likely to continue rising;
The deal you’re getting is not that different from a fixed rate;
Or if you plan to stay in the property for the long-term.

In short, tracker mortgages can be a good choice if you're comfortable with the risks of variable rates. But they may not be a good idea for you if you value some stability or if you think that interest rates are going to rise. It all comes down to your financial situation and long-term plans.

How does my credit score influence the cost of a tracker mortgage?

Your credit score has a big impact on the cost of a tracker mortgage in the UK.

First of all, if you have a higher credit score you’ll get lower rates.

This is because lenders view borrowers with higher credit scores as lower risk. As a result, they offer the best tracker mortgage rates to those in the “Excellent” credit score band.

This can add up to quite a bit. For example, someone with a credit score of “Very Good” might be offered a rate that’s 0.5% higher than someone with “Excellent” credit score. For a mortgage of £500,000, this 0.5% can add up to over £87,000 over 30 years.

Second, poor credit score means fewer lender options. If your credit score band is “Fair”, for example (under 720 on the Experian scale), you may have trouble getting a conventional tracker mortgage from most lenders. You may even need to seek out specialist lenders who work with borrowers who have bad credit.

Third, lenders also often require a larger deposit from borrowers with lower credit scores, to offset the higher risk. For example, you may need a 25% deposit instead of 10% if your score is below the “Fair” band.

Finally, some tracker mortgages have "collar rates" that prevent the interest rate from falling below a certain level, even if the base rate drops. This protects lenders but limits how much you can save if rates fall. As you can expect, collar rates are much more common for people with lower credit scores.

In other words, even small differences in credit score can make a big impact on the cost of your mortgage. Having a higher credit score gives you access to the best tracker mortgage rates, the widest choice of lenders, and the most flexibility when it comes to deposit size and collar rates. This is why working on your credit score before applying for a mortgage is so important.

Luckily, now there are many apps that can help you build and improve credit.

One such app is Wollit. Wollit is an app available both on Android and iOS, and it works by reporting a fixed-fee monthly subscription as a loan repayment to all three credit reference agencies (Experian, Equifax, and TransUnion). This helps you build your credit history and gives you a chance to improve your credit score and get the best possible tracker mortgage deal.

On top of this, Wollit can also report your monthly rent payment to Experian. This can add another line in your credit report that shows lenders that you’re a reliable person who pays their bills on time, helping you make the most of your rent while you prepare to become a homeowner.