Tracker mortgage rates may not fall
Up to 600,000 mortgage borrowers will not benefit from yesterday’s interest rate cut because of rate floors on tracker deals.
Tracker mortgage literally track the Bank of England’s base rate and borrowers should, therefore, see their monthly payments decrease by 1% as a result of December’s cut. However, of the 3.9 million tracker mortgage borrowers in the UK, as many as 600,000 will not benefit because some lenders refuse to reduce their tracker rates below a certain level.
Interest rate floors or ‘collars’ are often buried in the terms and conditions of tracker deals, and mean the rate will never fall below a certain level even if the base rate does. The majority of borrowers might not have taken these collars into account when picking the mortgage, experts say, because it was assumed the Bank of England base rate would never fall that low.
Lenders such as HBOS, Nationwide, Abbey and HSBC all impose minimum tracker rates.
Ray Boulger, senior technical manager at John Charcol, says: "This will be the first time a significant number of borrowers on a tracker mortgage will feel the impact of a collar. I estimate that out of about 3.9 million borrowers with a tracker mortgage 500,000 - 600,000 will not see the full benefit of this cut, and some will see no benefit.”
Both Halifax and Nationwide have now said they will not impose the collars on their mortgages. Previously, Nationwide imposed a 2.75% floor on its tracker range while Halifax’s is 3%.
Graham Beale, chief executive of Nationwide, says the move is designed to support borrowers in the current “exceptional market conditions”.
“This condition on our tracker mortgages has been a feature of them for the past four years,” he adds. “It is clear, fair and reasonable that in the very challenging financial environment that many people are experiencing, waiving the floor in this way is the right and proper thing to do.”
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.