Tracker Rate
The payable interest rate is directly linked to changes in the Bank of England or other Base Rate.
Tracker interest rates are set at a certain percentage above or below Bank Of England or other base rate, and this percentage difference is fixed.
For example, if the Bank of England base rate fell by 0.25%, the Tracker rate would also fall by the same 0.25%
Tracker Collar
Care needs to be taken when considering tracker mortgages, as some lenders operate a 'collar'. This means that if the Bank of England base rate were to fall below the collar, you would not benefit.
For example, if you have a tracker rate with a lender which operates a collar, of say 2.75% and your tracker mortgage tracks the Bank of England (B of E) base rate as (say) 1% over base.
If the B of E base rate is 3% your payable rate will be 4%.
However, if the B of E rate dropped to (say) 2% your payable rate would NOT be 2% plus the 1% tracking rate, but would be the collared rate of 2.75% plus your tracking rate of 1% so your payable interest rate would be 3.75%.
At a time of relatively high interest rates, such a collar would be unimportant, however, as there is a possibility that the Bank of England base rate could go down very low, possibly as low as 1% or 1.5%, whether or not a mortgage would have a collar is a very important consideration indeed.
