Tracker mortgages – the way to go?

The significant and dramatic reductions in the Bank of England interest rate in the past few weeks has seen a flurry of interest in the area of tracker mortgages, that is those that follow the base rate to at least some degree.

The average tracker mortgage, according to available data, has fallen from 6.27 percent in October of this year to only 3.27 percent now, in early December. So what does this mean for the consumer?

How much can be saved with a tracker mortgage?

Consumer analysts have suggested that the average save per mortgage could be as much as £260 per month. That is a considerable saving, and one that will be welcomed by those who have tracker mortgages.

With over four million tracker mortgages currently in play that is a saving of over £750 million in total in the next month, amounting to a staggering £9 billion forecast for the coming year at current interest rates.

However, there are pitfalls to some tracker mortgages, in particular those that are restricted by a collar.

What is a collar?

Some tracker mortgages come with a collar attached, and this is an interest level below which repayments can not fall. It may be that a tracker mortgage has a collar of, say, three percent, meaning that if the base interest rate falls below that amount no further savings will be given to the borrower.

At present those with collared tracker mortgages stand to benefit, but only up to the level their agreement is set at; with further rate costs forecast in the coming months it could be worth the borrower checking the collar level on their mortgage.

What advantages are their with a tracker mortgage?

There are a number of benefits associated with tracker mortgages, not least the aforementioned link to the base interest rate, and some of these are more noticeable at some times than at others. The added confidence of knowing that the interest rate is linked to a falling base rate is a major benefit, but there are other benefits that may be offered.

Some lenders will provide an incentive in the form of an initial rate that is lower than the current fixed rate of interest, while others will offer the option of moving to a fixed rate mortgage at a certain point without incurring the charges that may otherwise be applied for early termination of the contract.

The savings made by a tracker are not influenced by the lenders standard rate but by the base rate set by the Bank of England or, in some cases, another specified rate, and the contract obliges the lender to follow this rate within an agreed period of any changes being announced.

Are there any other disadvantages of a tracker mortgage?

Even if the tracker mortgage is not hindered by a collar there are some potential pitfalls that should be understood.

One of these concerns the very nature of tracking a specified interest rate for just as savings can be made should that rate fall, so costs can be incurred should the rate rise. The Bank of England may currently be cutting interest rates and, thus, saving tracker customers money, but when those rates begin to rise again the monthly repayment will increase.

Like all such agreements attention should be paid to the small print as this is where the finer details are to be found. There may be any number of agreements between borrower and lender, among them the aforementioned collar and also an occasional clause that allows the lender to change the margin that the rate tracks the base rate. This can result in savings being somewhat less than anticipated, and sometimes in costs being greater.


The usual threat of early repayment fees still stands with regard to tracker mortgages, and there are a number of further fees that may be part of the agreement. It is vital to understand what happens following the tracker period, as this is a time where interest rates can be increased by prior agreement, and repayments have been known to increase considerably as a result.

It is a good idea to seek independent finacial advice prior to accepting anyone particular type of mortgage. has a good range of information from consumer rights to guides on financial products.

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6 Responses to “Tracker mortgages – the way to go?”

  1. I have a tracker mortgage, and have therefore benefitted handsomely from the Base Rate cuts this year, and I am now eagerly awaiting the letter from my lender to confirm the cut applied at the start of December, to take effect in January.

    The tracker I’m on is Base Rate + 0.55%, taken out 3 years ago (it was at Base Rate for the first 12 months). My December payment (at 3.55%) was £43 less than I paid in October (at 5.55%), and assuming I will get the full 1% cut as announced this month – dependant on any “collar” applied by my lender – then January’s payment should be down by another £21 (ish). All particulary handy, as I was made redundant 6 weeks ago….

    The indication is that rates will probably drop further in the New Year, so providing there isn’t a collar on my mortgage, then I will see further cuts in my monthly repayments. Of course, eventually the rates will start to go up again, at which point I will then look to change to a fixed-rate mortgage, which in theory will be at low rates – it will be a case of catching the mortgage market at the right time just as the Base Rate (and therefore my Tracker) starts to go up, but before the low rates on fixed products start going too high…

  2. Great news Matt. That was an astute decision and great to hear people actually benefiting from the rate cuts. Base Rate + 0.55% was a particularly good deal to secure. When a deal of this kind will return would be hard to say.

    The collar’s existence or not can often be found in the mortgages’ key facts documentation or alternatively a quick call to the lender will confirm whether there is one attached to the mortgage or not.

    It will be interesting to see what fixed rate deals are offered in the New Year.

  3. 0.55% above base rate is an excellent deal.

    I’m currently on 0.65 below base rate until 17 Feb 09. So my rate at the moment is 1.35%. Our payments have fallen by just over £200 in the past year.

    After 17 Feb our rate goes to base rate plus 1.99%. At the time we took out the deal this rate appeared OTT, but our plan was to jump to another deal. 1.99% over now looks to be a good deal too – especially when you factor in fees ect to re-mortgage. No-one can match that rate (LTV currently 76% ish).

  4. Well, I’ve now had a letter from my lender, confirming that I’m getting the full 1% reduction as announced in early December, so therefore my rate will be 2.55% from January 2009. If they do have a “collar”, I haven’t reached it yet…!!!

    Rumours are that another cut in the Base Rate is expected in January – the RICS is expecting a further cut of 1% overall in the 1st quarter of 2009, so I’m thinking 0.5% in January, and we’ll then see what happens from there…..

  5. […] good news to see their mortgage re-payments cut further and recently discussed in an article ‘Tracker mortgages the way to go‘. It is an interesting situation in that a simplistic view of some past mortgage deals, means […]

  6. Wish i had taken a tracker mortgage out when i had chance a few years ago. Think the time has gone now unfortunately for tracker mortgages, though i suppose they may return in the future

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