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tracker mortgages

Tracker mortgages go up and down with the Bank of England base rate. For example, you can have a tracker that is base rate plus 2%, meaning the interest you pay will always be 2% above the Bank of England base rate.


Tracker rates can be for the entire length of the mortgage, or just for an introductory period (between two and five years) after which the rates revert to the lender’s standard variable rate (which is invariably a lot more expensive).


Base rate trackers have the great virtue of transparency, as well as taking an element of uncertainty out of standard variable mortgages. You know that if the Bank of England cuts rates or raises them by 0.25%, then your mortgage rate will fall or rise by that amount.


Mortgage lenders have been criticised for not passing on interest rate cuts to customers on standard variable rate mortgages, and also for putting up their own rates even when the Bank of England hasn’t. Tracker mortgages do away with that element of unpredictability: when the mortgage goes up, you will know why.


Trackers can be astonishingly good value – lenders have even offered them at below the Bank of England base rate (meaning that you are borrowing the mortgage at interest rates less than banks can borrow from the Bank of England). In some highly unusual cases, this meant that people have had their mortgage rates literally cut to zero, with one couple celebrating a monthly mortgage payment of 1p a month.


However, because trackers respond to changes in the Bank of England base rate, they are still unpredictable. For homeowners on a tight budget, it might make more sense to start off with a fixed rate mortgage rather than a tracker.


Should I get a standard variable rate mortgage?

In almost all circumstances, no. They are just about the worst value mortgages you can get.


The standard variable rate (SVR) is the main interest rate that a mortgage lender charges its customers. Mortgages normally revert to the SVR after introductory periods for discounted rates, or as fixed rate deals or trackers come to an end.


Each mortgage lender has complete freedom to set their own SVR. The factors they take into account include the Bank of England base rate, the profit margins they want to make, the amount of savings they are taking in, and the costs of borrowing from the international money markets.


It can be difficult for borrowers to understand why the SVR is at the rate that it is, and its movement can be unpredictable – lenders can change them even when the Bank of England base rate stays still. For example, in 2012, the financial crisis in Greece pushed up international borrowing costs in the money markets, meaning that many UK lenders pushed up their standard variable rate even though Bank of England rates had stayed at 0.5%.


SVRs are generally about the most expensive type of mortgage on offer – they are far higher than the Bank of England base rate, and the various forms of introductory offers. Mortgage lenders rely on the inertia of homeowners to keep them on SVR once they have ended up on it. If you end up on an SVR, you should generally look at whether you can save money by remortgaging.

by Cormac Henderson

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