A tracker mortgage is one that is linked to the Bank of England base rate, either for a fixed term or for the whole period of the mortgage.
The advantages of a tracker are obvious, especially while base rate is as low as it is, at a record low of 0.50 per cent.
The disadvantages are that the amount you pay are linked to the whims of the Bank of England’s Monetary Policy Committee (MPC). Historically, when interest rates fluctuated wildly this could be very risky, and it is still the riskier option compared to a fixed rate mortgage.
But risks also offer potential benefits and the state of the economy has led the Bank to keep base rate at the same level since March 2009, meaning most people who took out a tracker mortgage in the past four years have not seen their mortgage interest payments rise by much.
At the moment the vast majority of economists expect base rate to remain at this level until at least the end of 2013, and many actually think there will be no change until at least a year after that.
This means that if you take out a two-year tracker now, it is very unlikely that the rate is going to rise in the two years that you hold the product.
When base rate rises, it is likely that the mortgage rate you pay will rise soon after. Lenders are usually pretty quick to up the rate when the base rate goes up. Conversely, when base rate drops, so should your mortgage although some lenders are quicker than others to pass on these savings through lower tracker mortgage rates.
D-Day March 2009
That is the date that the Bank of England completed a series of base rate cuts taking the rate that is used to set mortgage and savings rates down to a record low of 0.50 per cent in an attempt to protect house prices and the main source of overall wealth for middle England.
At that time, if you had just signed up to a medium or long-term fixed rate, you were most likely cursing your decision because tracker and discount mortgage rates dropped quickly and by a big margin.
Recent research from Moneyfacts shows that mortgage repayments as a proportion of disposable income have dropped from a peak of 48 per cent in July 2007, down to just 26 per cent of disposable income.
It enabled many people who came off a fixed rate to enjoy lower mortgage repayments as they either signed up to a tracker deal or just went onto their lenders new discounted standard variable rate.
Tracker rates have increased in the last three years
It took a while, but eventually, through strong competition the best deals on tracker mortgages fell to around two per cent in total for a time, but they have gone back up in recent months. However for most of the period since base rate fell, tracker deals have been more expensive than they were in 2007, before the base rate dropped.
From March 2009, it took a while for tracker rates to drop. HSBC, who have offered some of the best tracker deals in the past four years, are a good example to check how the tracker mortgage market has fluctuated in the last 44 months, since base rate hit its record low.
In July 2009, HSBC had a two-year tracker available at 2.24 per cent, plus base rate, a total of 2.74 per cent.
As consumers realised that the base rate was set to remain at its low level for a considerable period, demand went through the roof. This allowed lenders to reduce the cost of tracker rate deals and still make money.
In July 2010, First Direct offered a lifetime tracker at base rate plus 1.79 per cent, a total of 2.29 per cent and the fee was just £99.
A year later, there were similar deals from HSBC and First Direct and as late as February 2012, HSBC were still offering a tracker deal at 1.89 per cent plus base rate, a total of 2.39 per cent.
All of these best deals were only available to homeowners with a 40 per cent deposit but other deals for borrowers with a lower loan-to-value ratio followed similar patterns.
Read more - The top ten fixed rate mortgage deals
The top ten tracker mortgage deals for all types of buyers
So, what is the situation now? Base rate has not changed but the rates attached to the best tracker deals have increased.
HSBC offer the best tracker rates still when the total cost is combined with the fee. But they can only beat the rate they had in July 2009 by 0.10 per cent, their deal coming in at 2.64 per cent with a £999 fee.
The best deal for a 40 per cent LTV ratio
HSBC – 2.64 per cent – HSBC offers its variable tracker mortgage at base rate plus 2.14 per cent with a fee of £999. A 40 per cent deposit is required and there is no early repayment charge for this mortgage.
The best deal for a 35 per cent LTV ratio
First Direct – 2.79 per cent – First Direct offers its tracker mortgage at 2.29 per cent plus base rate. Again, the fee is £999. A 35 per cent deposit is required and there is no early repayment charge.
The best deals for 30 per cent LTV’s
Chelsea Building Society – 2.69 per cent – Chelsea’s two-year tracker deal charges 2.19 per cent plus base rate. It comes with a hefty fee of £1,695. You need a 30 per cent deposit for this one and an early repayment charge (ERC) applies until 30/11/2014.
Santander – 2.79 per cent – Santander’s two-year tracker deal comes in at 2.29 per cent plus base rate. It has a lower fee of £995. A 30 per cent deposit is required and an ERC applies for two years.
The best deals for a 25 per cent LTV ratio
West Bromwich BS – 2.64 per cent – West Bromwich Building Society’s two-year tracker deal has a low rate of 2.14 per cent plus base rate but of comes with a very large fee of £2,094 which means you may find a better deal with a higher rate but a lower fee. You need a deposit of 25 per cent and an ERC applies until 30/11/2014.
Yorkshire BS – 2.74 per cent – Yorkshire Building Society’s two-year tracker charges 2.24 per cent plus base rate. It has a fee of £995 and a deposit of 25 per cent is required. An ERC applies for two years.
Norwich & Peterborough BS – 2.89 per cent – N&P offers its deal at 2.39 per cent plus base rate and charges a fee of £795. A 25 per cent deposit is required and an ERC applies for two years.
The best deals for first-time buyers – 10 per cent LTV’s
HSBC – 4.49 per cent – HSBC’s deals for FTB’s charges base rate plus 3.39 per cent. The fee is £599 and a minimum deposit of ten per cent is needed. There is no ERC.
First Direct – 4.59 per cent – First Direct offers a rate of 4.09 per cent plus base rate. The rate then reverts to the Standard variable rate of 3.69 per cent, though this is likely to change over the next two years. There is no fee and a deposit of just ten per cent is needed. There is no ERC.
Post Office – 5.25 per cent – The Post Office deal charges 4.75 per cent plus base rate for two years. There is a £995 fee and a deposit of ten per cent is required. An early repayment charge applies for two years.