Contractor Tracker
Mortgages - What you Need to Know

What is a Contractor Tracker Mortgage? It’s a type of interest rate. The tracker rate is attached to the bank of England base rate. Bank of England Base rate is the interest rate at which high street banks and building societies borrow money from the Bank of England. If the bank of England base rate changes and you are on a tracker rate mortgage, your interest rate will change.

A tracker interest rate mortgage is a type of variable-rate mortgage. 

The Bank of England decides if it is essential to change the interest rate based on various economic factors, and this usually happens on the First Thursday of a month.

Example of a tracker mortgage

If the current Bank of England Base rate is 1% and the bank charges 1% plus the Bank of England Base Rate, your tracker rate will be equivalent to 2%.

If the Bank of England reduces the base rate to 0.5%, the tracker rate would be 1.5%.

There are several high street banks and building societies that offer tracker rates combined with offset mortgages.

Is the tracker rate the same as a discounted rate?

Tracker is similar to discounted rate mortgages. Both are variable mortgage products. Usually, discounted rates offer a discount on the standard variable rate of a particular bank. However, trackers are attached to the Bank of England base rate. 

When should I choose a tracker mortgage?

An essential aspect of a mortgage application is to consider the type of mortgage. As a contractor, you need to determine if it is a fixed or variable rate that works for you.  

During an Economic boom or inflation, borrowing will be more costly, and savings become attractive. At times like this, usually, interest rates will be increased by the Bank of England. If a contractor is on a tracker, it will affect the monthly mortgage payment. On the other hand, if it is a recession and low spending, interest rates are cut to encourage spending. This may help contractors. 

To decide if a tracker rate mortgage is suitable, day rate or hourly rate, contractors should also look at the certainty of repayments. Tracker rates are more transparent since the economic conditions impact the interest rate more than the commercial decisions of high street banks and buildings societies. 

Is fixed or tracker better for a contractor?

This would depend on the individual circumstances of a day rate contractor. During the Coronavirus pandemic, Bank of England reduced the base rates to 0.1% on 19th March 2020. The day rate contractors who were on tracker products would have reaped the benefits of lower interest rates they received due to the recent reduction.

If a day rate contractor has significant financial commitments, tracker rates may not be a suitable option. If the interest rate rises, the day rate contractor will find it challenging to cope with the payments.

If you are working as a day rate contractor and having sufficient savings, then tracker may be an option. 

Pros and cons of tracker rates

ProsCons
If BOE Base rates reduce, the tracker rate reducesIf the BOE Base rate increases, the tracker rate increases as well
Some tracker rate mortgages do not have Early Repayment charges. Therefore, if the rates increase, contractors can shift to a more suitable deal.If there is a collar imposed, the interest rates will not reduce below the collar.

Pros and cons of Fixed rates

ProsCons
Contractors will know the exact amount of monthly mortgage payment.If the interest rates reduce, contractors will still have to pay a higher interest rate.
When interest rates are increasing, contractors on fixed rates will have the opportunity to receive the same low-interest rate.Breaking the deal earlier than the stipulated period would cause to pay early repayment charges, and there will be restrictions on overpayments.

Are tracker rates available to contractors looking for a Buy to Let?

Yes, Trackers are available to contractors investing in buy to let properties through their name or a limited liability company special purpose vehicle. Options are available to first-time buyers as well and new contractors. 

Are tracker rates available to IR35 contractors?

Yes. Not all banks offer tracker deals. However, some lenders would consider IR35 contractors working via their own company, an umbrella company, or a fixed-term contract. 

Do banks borrow money from the Bank of England for mortgages?

Banks use money from depositors, borrows from money markets, and recycles its fees or income to fund its mortgages. These are the primary sources banks use to fund their mortgages. Bank of England is only the lender at last resort. Therefore, the Banks do not borrow money from the Bank of England most of the time. 

If you are on a tracker rate, your mortgage interest rates will change based on a Bank of England decision. However, this doesn’t necessarily mean that new tracker deals will have a drop if the base rate changes. This is because the bank still has to pay its borrowers at higher rates. Banks generally increase their margins in these instances. Therefore, new tracker mortgage rates are usually influenced by money market rates. 

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.