Ever heard the term “tracker mortgage” and wondered what it means? If you’re an Australian homebuyer or homeowner, you might not be too familiar with this concept, since local lenders do not commonly offset it.
So in simple terms – what is a tracker mortgage? It’s a home loan with a variable interest rate that moves in line with a specific benchmark (which is usually an official cash rate that the central bank sets).
But the main difference here is that, unlike a normal variable loan where the bank can change rates whenever, a tracker mortgage follows the official rate exactly. For instance, if interest rates rise, a tracker loan’s rate goes up by the same amount – and if interest rates fall, the loan’s rate drops equally.
How Tracker Mortgages Work
A tracker mortgage is essentially a loan where your interest rate “tracks” an external reference rate (like the Reserve Bank of Australia’s cash rate) with a fixed margin on top. So this just means that the rate on your loan will either rise or fall in sync with that benchmark.
For example, Auswide Bank introduced a tracker home loan quite a while ago in 2016 that was set at 3.99% p.a., and it even had a floor – the rate couldn’t drop below a certain figure even if the RBA cash rate fell to zero. The big benefit of this setup is transparency: whenever the RBA makes a move, your mortgage rate adjusts in step automatically.
Tracker Mortgages in Australia vs. the UK
Tracker mortgages are popular in some other countries, especially the UK. In Britain, a tracker mortgage usually follows the Bank of England’s base rate (their equivalent of the RBA cash rate) plus a set margin.
Most UK tracker deals tend to last only for a certain term (commonly two or five years), after which the mortgage interest rate switches to the lender’s standard variable rate (SVR).
In Australia, by contrast, tracker mortgages have been almost unheard of. As of 2016, such products were not offered by any of the major banks here. A few smaller lenders have tried them – for instance, that previous example we just gave of Auswide Bank launching a tracker loan – but they’re still very niche.
Big banks have argued that there isn’t much demand and that trackers could be risky or costly to offer (since the bank must pass on all rate cuts). And to compensate, lenders often set the margin higher on a tracker, so the tracker rate mortgage might not even always be the cheapest deal around.
Tracker vs. Standard Variable vs. Fixed Rates
How does a tracker mortgage compare to other home loan types that most Australians go for?
Standard Variable Rate Loans
This is the most typical Aussie home loan. The interest rate can move up or down, but it’s set at the lender’s discretion. Standard variable rates usually just follow the RBA’s movements, but banks often pass on changes only partially (and sometimes make independent moves).
So put simply, a standard variable loan gives the bank flexibility to set rates as it wishes, whereas a tracker guarantees your rate will mirror an external index exactly.
Fixed Rate Loans
A fixed rate mortgage locks in your interest rate for a set period (such as, 2, 3 or 5 years). During that time your rate won’t change – you’re shielded if rates rise, but you won’t benefit if rates fall.
Fixed rate mortgage deals definitely give you the more stable repayment option of the two types of loans we’re talking about right now. The downside is that there’s less flexibility: exiting a fixed rate deal early usually incurs an early repayment charge (a penalty fee).
Tracker loans, being variable, usually don’t have such penalties, but of course their rate can change at any time. Ultimately, choosing between a fixed or tracker comes down to whether you value stability or the chance to take advantage of rate drops. Or if you can even find a tracker loan in Australia.
Things to Watch Out For with Tracker Mortgages
If you’re considering a tracker mortgagee, keep a few caveats in mind. First, pay attention to the margin above the official rate – if it’s high, the loan might not actually even be a bargain. A tracker isn’t automatically the cheapest option just because it follows the RBA rate; a large margin could make the interest cost higher than some regular variable loans.
Second, check if there’s a floor rate. Some tracker mortgages set a minimum interest rate for the loan. For example, a lender might specify that the rate won’t fall below 2.50%, so even if the RBA cash rate dropped to 0%, your interest rate could not go below that floor. A floor protects the lender but limits how low your rate can go.
Also, consider the loan features. Some tracker loans lack extras like offset accounts, though they may still allow extra repayments or redraws. So just make sure you can live without any features the loan doesn’t include.
Finally, we’d always recommend that you check for any fees. Trackers generally don’t impose big break costs like fixed loans do, but it’s worth confirming that there’s no hidden exit fee or early repayment charge in the contract.
How Rate Movements Affect Your Payments
Again, the main appeal of a tracker is that your monthly mortgage payments respond instantly to interest rate changes. If the RBA moves the cash rate, your lender will adjust your rate by the same amount immediately.
If rates go down, your mortgage repayments will get smaller. If rates go up, your payments will increase by the same margin. This is great when rates are falling, because you see savings straight away. But obviously the inverse of this means it can sting when rates are rising – you need to be prepared for the higher costs.
And remember, the RBA typically meets monthly (except January), so your rate could change several times a year. Be sure to budget with that potential volatility in mind.
Fixed or Tracker Rate: Which Should You Choose?
So, should you go for a fixed or tracker rate? If you prefer monthly payments that don’t change, a fixed rate is probably going to suit you better. If instead you want to ride the interest rate waves and benefit from any cuts, a tracker could be better.
For example, if you plan to sell or refinance in a couple of years, a tracker gives you more flexibility since there’s no break fee. A fixed rate could tie you down unless you pay an early repayment charge to exit early.
Just keep in mind through all this that you might not even find a reputable tracker loan to even invest in, but this is the logic you’d apply if you were applying for one in England, for instance, where these loans are a lot more common.
How Upscore Can Help
Upscore’s Finance Passport lets you easily compare mortgage options side by side for free, which makes the search process much simpler. If you’re exploring home loans, make sure you give it a try and find a deal that suits your needs!
