Why are Tracker Mortgages Becoming so Popular?

Tracker mortgages have gained significant traction in the UK housing market throughout 2024, with recent data showing a 67% surge in uptake compared to 2021.1 The appeal of these products stems from their flexible nature, offering interest rates that follow the Bank of England’s base rate, which has become especially attractive amidst ongoing economic uncertainty and fluctuating interest rates.

What is a tracker mortgage, and how does it work?

A tracker mortgage is a type of variable rate mortgage which tracks a pre-arranged independently set interest rate – usually linked to the Bank of England base rate – for a set period. The term could be between 1 and 5 years, or an open-ended lifetime tracker mortgage. Like all variable rates, they go up as well as down, depending on movements in the Bank of England base interest rate.2

For example, if the base rate is 5% and your tracker mortgage is set at ‘base rate plus 1%’, then your interest would be 6%. If the base rate drops to 4%, your interest would decrease to 5%.

What is Driving the Shift?

In 2021, only 118,818 tracker mortgages were issued in the UK, but by the first quarter of 2024, this figure had skyrocketed to 198,044. According to research, the growing appeal of tracker mortgages is tied to the shifting interest rate environment1. As the Bank of England’s monetary policy evolves, borrowers have increasingly looked for mortgage products that provide them with the flexibility to benefit from potential interest rate cuts faster than those on fixed-rate mortgages.

Two-Year Tracker Mortgages Lead the Surge

Among tracker mortgages, two-year products have seen the most significant growth, with an 87% rise, jumping from over 86,000 in 2021 to more than 160,000 two-year tracker mortgages in 2024. This suggests that borrowers are particularly keen on short-term deals that offer immediate savings, allowing them to benefit from a potential rate reduction over the next couple of years3.

Borrowers are likely anticipating that interest rates will stabilise or decrease in the near future, making short-term tracker deals an attractive option. However, it’s worth noting that this rise comes at the expense of longer-term products. For instance, three-year and five-year tracker mortgages have seen declines in uptake, with three-year deals dropping by 66%, and five-year deals by 26%, as borrowers are wary of locking into longer terms given the current uncertainty around interest rates over the longer-term period.3

What are the main risks of a tracker mortgage?

While tracker mortgages can offer financial advantages, they come with risks. Given their flexible nature, it’s important to consider the emotional toll of fluctuating monthly payments.

For borrowers who are prone to financial stress, the unpredictability of a tracker mortgage can lead to anxiety, especially if the Bank of England unexpectedly raises rates.

Additionally, while some borrowers may enjoy lower payments when rates fall, others could see their monthly mortgage costs increase if rates rise. It’s crucial to carefully weigh the short-term savings against the long-term risks and ensure that you’d be comfortable with the possibility of higher repayments should the economy change – especially bearing in mind the turbulence seen in recent years.

Is a Tracker Mortgage Right for You?

The decision to opt for a tracker mortgage depends on your own financial goals, lifestyle, tolerance of risk and your outlook on the interest rate environment ahead.

For those who believe that interest rates are likely to fall or remain stable, a tracker mortgage may possibly offer more financial flexibility than a fixed-rate mortgage. However, it’s important to remain vigilant, keep an eye on interest rate movements and be prepared for the potential of increased payments with relatively short notice.

If this is something of interest to you, then please do get in touch to discuss further. We’ll listen to your exact circumstances and make bespoke recommendations to fit your precise needs, to allow you to make an educated decision on your mortgage.

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or other debt secured on it.

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