Interest rate increase on trackers ahead of base rate cut

Tracker mortgages have been becoming more popular in recent times and they are linked to the base rate, so in a new move, lenders have been putting up the interest rates on these products in anticipation of a possible cut in the base rate sometime this week.

According to figures supplied by the Council of Mortgage Lenders, towards the latter part of 2007 almost 25% of new loans were tracker ones, as opposed to only 15% at the start of 2007.

There is widespread speculation that the Monetary Policy Committee will once again trim the base rate which no doubt will in turn increase the appeal of tracker products, hence mortgage lenders have prepared for an increase in demand for this product in advance by increasing the margins on their tracker loans.

Mortgage analyst Denise Harvey at Moneyfacts has stated that within the last fortnight, at least 10 lenders have increased margins on their tracker mortgage products as much as 1.15%. For example, Abbey has put up the margin on one of ots two-year tracker products by precisely 1.15%, changing it from the base rate plus 1.34 points resulting in a rate of 6.84% to its current rate of base rate plus 2.49points-totalling 7.99%.

Another example is the Bank of scotland who, on a two-year tracker product has gone from base rate plus 0.24 points to base rate plus 0.44 points.

These rate increases do not affect existing customers, but will make it more expensive for a new borrower when setting up a mortgage. Ms Harvey says, “The message for any prospective borrower would be to act quickly, or face paying much higher rates.”

Mortgage broker firm John Charcol declare that tracker products still offer better value than discounted mortgages, since trackers are linked to the base rate, so are required to follow it up and down, whereas discounts are tied in to the lender’s standard variable rate which does not necessarily alter whenever there is a reduction in the base rate. Katie Tucker, from John Charcol says, “After the last cut, around a fifth of lenders did not pass the cuts on a t all and many others only passed on less than the cut in the base rate.”

Katie’s firm recommends the Britannia’s two-year tracker at 0.2 points over the base rate, thus giving a rate of 5.7%, with no early repayment charges. Lloyds TSB also offer a tracker at 0.38 above base rate for the whole term of the mortgage, and like Britannia, no early repayment charges.

There is also a general reduction in price for fixed rate mortgages, with some at less than 5%, however there is a general belief within the financial industry that this figure could come down even further, and would recommend holding out for a really great deal.