A bank base rate tracker mortgage moves in line with interest rate levels set by the Bank of England. Mortgage payments will go down if interest rates go down and visa versa. Although a Standard Variable Rate (SVR) mortgage also achieves this, a bank base rate tracker mortgage has a smaller margin.
Examples of Tracker Mortgages Based on a Base Rate of 2%
All base rate tracker mortgages will factor in a profit margin for the banks. This is the difference between the bank base rate and the rate of interest charged. It is important to take note of the arrangement fee.
- 2-year tracker at 3.49% (1.49% above base rate) from Nationwide, max 75% LTV, £1195 fee
- 3-year tracker at 3.79% (1.79% above base rate) from Nationwide, max 80% LTV, £1495 fee
Advantages of Bank Base Rate Tracker Mortgages
- Lower margin than the Standard Variable Rate mortgage. Bank base rate trackers usually have a smaller difference between the Bank of England base rate and the actual rate offerered. This means lower profit margins for the bank and lower mortgage payments for the customer.
- Bank of England base rate cuts. As 70% of the UK mortgage market have a fixed rate mortgage they won’t benefit from reductions. Interest rates will be reduced shortly after an interest rate cut.
- Redemption penalties. Unless a discount base rate tracker has been taken out, it is usually possible to move mortgage without early redemption penalty. This should always be checked with the mortgage provider before signing up.
Disadvantages of Bank Base Rate Tracker Mortgages
- Unpredictable. During times of high inflation borrowers could be hit by a series of interest rate rises that increase mortgage payments.
- Arrangement fees. All banks charge an arrangement fee for setting up the mortgage. It is necessary to decide whether it is better to pay this or continue at Standard Variable Rate.
Are Base Rate Tracker Mortgages Working?
It is surprising to discover that a lot of tracker mortgages aren’t falling as quickly as Bank of England base rates. The problem is that banks are finding it hard to balance the needs of savers and borrowers in light of the current climate of low interest rates. LIBOR rates, the rate at which banks borrow, are also staying stubbornly high.
Ray Boulger of mortgage broker, John Charcol, stated: “If people buy a tracker mortgage they expect their rate to move in line with base rate. They will be shocked to learn that their rates won’t do that. A tracker ought to do what it says on the tin.”
Bank base rate tracker mortgages are one of the best mortgage deals on the market. However, it is important to budget for interest rate increases and not just rate reductions. The arrangement fees often amount to 1% of the amount borrowed which can mean that the difference between a tracker and SVR isn’t nearly as great as might have been thought.