Tracker mortgages explained, and how to get to grips with rates!


In recent times ‘I don’t know what a tracker mortgage is’ has changed to ‘I still don’t know what a tracker mortgage is’. This question comes up in my consultations time and time again, usually with an embarrassed smile, so let’s answer it – what is a tracker mortgage?

To best explain what a tracker mortgage is, we must first know what a ‘variable rate mortgage’ is. A variable rate mortgage has a variable rate of interest, in other words, the interest rate on the mortgage, changes by going up or down. This variable rate is set by the lender who sets their own interest rate by deciding the profit/margin they wish to make at any given time. Because your interest rate can go up, your monthly payment can also go up.

A tracker mortgage is a variable rate mortgage, but rather than lenders setting the rates, a tracker mortgage follows or ‘tracks’ the European Central Bank (ECB) rates. In this regard, you have certainty your mortgage repayments will be whatever the ECB rate is plus the lenders margin which is set for the full mortgage term.

So let’s talk about rates: In the aftermath of the 2008 financial crash ECB interest rates plummeted to 0 per cent, making tracker mortgages very attractive for consumers, and loss making for the banks. Consequently, Irish banks withdrew all tracker mortgages from the market and attempted to move a number of customers off tracker mortgages in order to reduce their losses.

Tracker mortgages have been exposed to rate rises since July 2022 and the average tracker rate is now 4.65 per cent. In truth, these rates are likely to rise again and most analysts, myself included, believe tracker rates are unlikely to ever return to the rates seen since the 2008 crash.

Inflation continues to rise across Europe, and it remains unclear how high rates might go or when they might start to fall again. In the last eight months alone the base-rate followed by tracker mortgages have risen from 0 per cent to 3.5 per cent (European Central Bank). For the customer this means the average tracker rate has jumped from 1.15 per cent to 4.65 per cent; it can be hard to comprehend what these percentages mean in real life so, for example, a 3.5 per cent increase over a 15-year term mortgage equates to an additional €24,000-plus to the cost of the average tracker mortgage.

It is thought the ECB rates may rise to more than 4 per cent before the summer is over. And, depending on your lender and when you signed up, the lender’s margins ranged from 2.5 per cent above the ECB base rate to as low as 0.5 per cent above the rate. The average tracker rate is now 1.15 per cent above the ECB base rate.

The near 0 per cent interest rates we’ve enjoyed since 2008 are historically unprecedented. Most analysts now predict should ECB rates fall in future, they are likely to fall to between 2.5 to 3 per cent.

The good news is that the option of ‘fixed rates’ are still available for most tracker mortgage customers, should you choose to look into this. A fixed rate assures your mortgage repayments are at a similar level to today’s rates, while capping any potential rises in future.

If you are concerned about your tracker mortgage and would like to talk to explore your options, I recommend making an appointment with myself or a member of my team who can guide you through the process.

This article aims to give information, not advice. Always do your own research and/or seek out advice from a Financial Broker before acting on anything contained in this article.

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