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Use our UK Finance guide and learn by experience. We outline pitfalls so that you don't have to learn the hard way, as many of us often do.

Mortgage

Base Rate Tracker Mortgages

A base rate tracker mortgage is linked to the Bank of England base rate via a fixed rate percentage. Your mortgage payments will drop or rise depending on related base rate changes.

Base rate tracker mortgagesmirror exactly any changes to the Bank of England base rate, whereas normal variable-rate mortgages follow the SVR. Most people that take up this product do so because they want to gamble on base rates (and therefore on their own mortgage interest rates) in the hope that they'll save money over time if base rates fall.

Types of Tracker

Trackers offer some security as the rate is guaranteed never to exceed the base rate by more than a fixed margin. But payments will probably fluctuate so they may not be suited to those on a strict budget. As with standard rates, however, tracker rates can be fixed, discounted, stepped, flexible, capped and so on, so are adaptable to individual needs. The rate simply follows the base rate rather than the SVR.

For example:

Fixed Tracker Mortgage: The rate will be fixed for a period of time - usually between one and five years. When the initial period is over, the mortgage reverts to a tracker.

Discount Tracker Mortgage: Discounts or stepped discounts that follow the base rate can be built into the start of the mortgage term, again for a set period.

Capped Tracker Mortgage: Your mortgage rate follows the base rate as with a normal tracker but with the security of a cap to prevent it rising above a set level.

Advantages of Base Rate Tracker Mortgages

With a tracker, you benefit instantly from any drop in the base rate, which means you can work out immediately what your pay rate will be as soon as the Bank of England announces it. If your mortgage never reverts to your lender's SVR your rate will always be competitive with other products.

Also, the difference between the tracker rate and the base rate is usually a lot smaller than the margin between SVR's and the base rate. And the lender can't change this, so in some ways this is a fairer system.

Disadvantages

If interest rates fluctuate. the amount of your repaymems will too - and a rise in rates will obviously see them go up. This can make budgeting difficult so if you can't afford more than a certain amount each month you may not want to take this risk, unless you're certain rates wont rise significantly,

Double-check in your lender's small print that your rate can't rise. For example some lenders guarantee that the pay rate will not rise over 1% above the base rate, but may include opt-out clauses that in 'exceptional circumstances' they can waive that guarantee.

The situation varies between lenders but early repayment charges may be levied if you payoff your mortgage early or switch product or lender before the end of the initial period.

LIBOR Mortgages

LIBOR mortgages work in exactly the same way as base rate trackers but mirror a different interest rate - the London Inter Bank Offered Rate - the rate at which banks offer to lend money to one another in the wholesale money markets in the City of London. Historically this rate has been lower than the base rate - but as with any financial product, past performance is no indication of future trends.

What you need to know

  • The rate of a base rate tracker directly follows changes in the Bank of England base rate
  • The pay rate is typically 1 % to 2% above the base rate
  • Usually, trackers never revert to the lender's SVR, often higher than tracker rates .
  • Products can be fixed, discounted or capped.
  • You benefit from any base rate falls but are exposed to the risk of your pay rate rising if the base rate increases
  • Turn to p38 for the best mortgage deals this month 00

 

Browse our UK mortgage guide

For most of us, buying a property will be one of the biggest decisions and purchases in our lives. Choosing the right mortgage deserves serious attention and planning.

With the collaboration of financial advisors we have put together a comprehensive guide to mortgaging in the UK. This guide will help you to find the right mortgage for you and put you on the right path to understanding what type of mortgage you will need.

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