What do tracker mortgages track?

Most Britons do not know that the interest rates charged on a tracker rate mortgage are linked to the Bank of England's base rate.

Alliance & Leicester research shows that 58 per cent of homeowners do not understand how or why tracker mortgages change their rates.

"It is quite worrying to think that such a large proportion of homeowners are unaware of what a tracker mortgage is and how it could save them money on their monthly mortgage payments," said Stephen Leonard, director of mortgages at Alliance & Leicester.

"There are certain advantages to choosing a tracker mortgage, especially with current low interest rates. However, homeowners should ensure they fully understand what type of mortgage they have; they can then be financially prepared should their monthly payments rise."

Tracker mortgages change the interest rate they charge to stay in line with the Bank of England base rate. While variable-rate and capped-rate mortgages also tend to move broadly in line with Bank of England base rate, a tracker mortgage is guaranteed to keep its rate in line with the Bank of England's.

This means that the full benefit of any cut in interest rates will definitely be passed on to mortgage holders, and lenders cannot choose to alter the rate themselves - as is the case with variable rate mortgages.

Just one homeowner in three knows that the interest rate on a tracker mortgage is linked to the Bank of England base rate, with close to one in five believing trackers are linked to the FTSE 100, and four per cent thinking monthly payments are fixed.

"Tracker mortgages generally suit those who have a degree of flexibility in their budget and so stand to benefit from cuts in their monthly mortgage payments following a base rate cut, as well as afford any increases," Mr Leonard noted.

To see if you can save money by moving to a tracker mortgage, go to www.myfinances.co.uk/mortgages.htm