According to recent reports, one lender has seen a big shift towards borrowers seeking tracker mortgages. Why is this … and is it a good thing?

This seems like a good time to start off with the usual comment about always seeking individual advice before making any decision about your personal finances, because nothing written in an article like this can possibly apply to everyone.

However, it is worth considering the broad principles, to which individual circumstances can be applied.

What are trackers?
Most mortgages were historically based on variable interest rates. This meant that the lender could vary the interest payable up or down virtually at will, with no regard to external conditions (other than, perhaps, competition). Unsurprisingly, this did not appeal to many borrowers and the trend developed for lenders to offer fixed rate mortgages or, sometimes, capped rate mortgages. The latter were similar to fixed rate deals, but could go down if prevailing rates fell; should rates generally bounce back up, the rate could not go above the cap.

Some lenders, however, decided that borrowers might prefer a level of predictability without having to be tied in for a fixed term to one rate. As a result they decided to tie the interest rate they charge borrowers to a fixed differential compared with an index – often the Bank of England’s base rate, although some other indices are also used, including the lender’s own base lending rate.

So if the fix was 0.5% above base rate, then when the Bank of England was charging 5%, borrowers in the tracker would pay 5.5%; now they would be paying 1%. In fact at one time, some ties were actually set at 0.5% below base and these lucky borrowers are now paying nothing (at least, in theory – they are actually paying a modest amount as lenders’ systems will not cope with receiving nothing every month).

Why are they becoming more popular
There are currently a number of tracker deals available, typically at between 1.9% and 2.8% above base rate, depending on the type of mortgage. The reason people like them is because they offer some degree of protection against lenders hiking interest rates by a larger percentage than the Bank of England does. Whether or not these offer good value depends on your view of how the market generally will go; that is, will lenders push up their interest rates more quickly – or more slowly – than base rate rises? And, of course, what will actually happen to base rate?

What are the possible pitfalls?
There is also another potential issue and that is the so-called collar or handcuffs that lenders have learned to apply to trackers. As indicated earlier, some lenders have been badly caught out by the fall in base rate to such historically low levels. As a result most, if not all, will now apply a level below which their interest rates will never fall, whatever happens to base rate.

Whether or not a tracker is for you – or you might prefer one of the alternatives currently available – will depend on your personal circumstances.

That is why it is so important that you should take individual professional advice before making any decision relating to your personal finances. Your home may be repossessed if you do not keep up repayments on your mortgage. Think carefully before securing other debts against your home. Fees for mortgage advice may be charged and further information, please contact Robert Bruce Associates.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.