Brokers recommend base rate trackers

Mortgage borrowers who are joyfully anticipating a New Year cut in the base rate are being warned that lenders may not follow suit.

Brokers are pointing out that some borrowers on variable-rate loans may be disappointed because there is a major difference between “trackers” and “discounts”, the two main types of variable-rate loan.

Tracker-rate mortgages “track” the Bank of England base rate for an agreed term, whilst discount rated mortgages track the standard variable rate (SVR) of the individual bank or building society.

Louise Cuming from Moneysupermarket.com, the price-comparison website, points out that trackers “are completely transparent as they will always move in line with base rate at a guaranteed differential.”

If there is a quarter-point reduction in the base rate this will be reflected in the mortgage payment for the following month.

Whereas with discount mortgages lenders do not have to move in line with the base rate and can make a change at any time.

Difficult market conditions have left many lenders looking for ways to improve their margins and earlier this month, Standard Life raised its SVR by 0.15 percentage points, to 7.46%, despite the Bank of England’s decision to leave the base rate at 5.75% in November.

At best, lenders are likely to be slow to change their SVRs if and when the base rate cut comes.

Nationwide Building Society is currently offering a base rate tracker at 5.58%, for two years, with a fee of £1,499 and the Woolwich can provide a base rate tracker at 5.69% for two years, with a £995 fee.

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