- A tracker mortgage is a mortgage option offered in the United Kingdom by which the mortgage's interest rate is set at a certain margin in relation to the base rate established by the Bank of England. As the base rate rises or falls, so does the borrower's interest rate. Depending on the economy and rate of inflation, a tracker mortgage can be quite a popular option. When interest rates are low, which typically happen during recessions and times of economic turmoil or uncertainty, the borrower's mortgage rate is low. However, the reverse is true as well. During times of economic boom, the base rate tends to rise, and if the borrower's tracker mortgage is set at 2.5 percent above the base rate, then that individual's interest rate could add a substantial amount to her monthly mortgage payment.
- Like all good things, there are typically caps to how low a tracker mortgage's interest rate can fall. Referred to as "collars" or "floors," British lenders typically include a clause in the mortgage contract that places a limit on how low the mortgagee's rate can go. This cap can depend on a number of factors, including the amount of the mortgage and the individual's credit history. The cap typically keeps the interest rate at or above 2 percent or 3 percent. Additionally, if you apply for a tracker mortgage when interest rates are at historic lows, it's likely that your collar will be higher than it would if interest rates were at moderate or high levels.
- Some of the most popular lenders offering mortgage trackers are Halifax, Nationwide, Skipton Building Society, ING Direct, Sainsbury's and Alliance & Leicester. Most tracker mortgages exist for two- or three-year periods, with interest rates typically ranging from 1.5 percent to 3 percent above the bank rate. This means that if the bank rate set by the Bank of England is 3 percent, then an individual with a mortgage tracker of plus 2 percent would end up paying a 5 percent interest rate.
