Base Rate Tracker Mortgages

The interest rate of a tracker directly follows the Bank of England base rate.

In a Nutshell...

• The rate of a base rate tracker directly follows changes in the Bank of England base rate.
• The interest rate is typically 1% to 2% above the base rate.
• Usually, trackers never revert to the lender's standard variable rate, often higher than tracker rates. Products can be fixed, discounted or capped.
• You benefit from any falls in the base rate, but you risk your interest rate rising if the base rate increases.

What is it?

Base rate tracker mortgages mirror exactly any changes to the Bank of England base rate, whereas normal variable-rate mortgages follow the lender's standard variable rate. Lenders can change their standard variable rate (SVR) regardless of changes to the base rate, although most broadly follow it.

Trackers offer some security as the rate is guaranteed never to exceed the base rate by more than a fixed margin. But payments may fluctuate so they may not be suited to those on a strict budget. That said, tracker rates are adaptable to individual needs, since they can be fixed, discounted, stepped, flexible, capped and so on, like standard rates, but following the base rate. Some types are:

• Fixed tracker: 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: 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: 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.

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, there's no guarantee that this will always be the case.

Advantages

• You benefit instantly from any drop in the base rate, which means you can work out immediately what your interest 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.
• The difference between the tracker rate and the base rate is usually a lot smaller than the margin between SVRs and the base rate. Since the lender can't change this, this is in some ways a fairer system.

Disadvantages

• If interest rates fluctuate, the amount of your repayments 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 won't rise significantly.
• Some lenders guarantee that the interest rate will not rise over 1% above the base rate, but may include opt-out clauses where they can waive that guarantee in 'exceptional circumstances'. Always double-check your lender's small print to make sure your rate can't increase.
• Early repayment charges may be levied if you pay off your mortgage early or switch product or lender before the end of the initial period. This varies between lenders.

Costs and charges

Interest is charged at a set percentage - typically between 1% and 2% - above the base rate for the duration of the mortgage or until you switch product or lender. Unlike most other mortgages, trackers don't revert to the standard variable rate at any point during the life of the loan, unless stated.

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