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 Transparent trackers from Complete guide to Homebuying March 2003 If you want to know exactly how your pay rate is calculated get a tracker mortgage - but make sure you read the small print, says Hilary Osborne If you've decided against a fixed-rate mortgage you now need to choose between a range of variable rate deals. One choice you need to make is whether to go for a discount or capped rate. Another is which rate to link your loan to. Alongside their own standard variable rate (SVR) deals many lenders have introduced tracker mortgages - loans with an interest rate pegged to the Bank of England Base Rate or, more rarely, the London Inter Bank Offered Rate (LIBOR). What exactly does this mean? The pay rate on the mortgage will follow any movements in the rate it is tracking. Usually there is a margin between the rate that is being tracked and the pay rate, for example, Co-operative Bank's five-year tracker is priced at 0.59 per cent above the Bank of England base rate. This puts the current pay rate at 4.59 per cent. Whenever the base rate moves either up or down the rate you pay on your mortgage will change, although it make take several days for this to take effect. "The change may take a couple of days - we will need to put it through the system," says Tanya Mills, spokeswoman for Yorkshire Building Society. So however far rates rise or fall my pay rate will follow? In theory yes. If rates rise by 0.50 per cent your interest rate will be 0.50 per cent higher; if a rate cut of 0.25 per cent is announced your pay rate will fall by 0.25 per cent. A spokeswoman for Nationwide Building society says: "There's no lower limit on our tracker so it will follow rates as far as they go." The same is true at Yorkshire Building Society. Mills says: "There isn't a collar on our mortgage so the rate can go right down to zero." However, she adds: "None of our current trackers are base rate minus anything but if they were, they would stop at zero. We wouldn't pay someone to have one of our mortgages." But not all lenders have adopted this policy. Abbey National for instance has a minimum pay rate of 1 per cent on all of its tracker deals. And Halifax recently came under fire for adding a new clause to its tracker deal. On tracker mortgages taken out since mid-November Halifax reserves the right to stop tracking the base rate if it falls below 3 per cent. "If the Bank of England Base Rate falls below 3 per cent we have an option, and we may not follow it down," says Halifax spokesman Mark Hemingway. "The rate would have to reach 2.75 per cent before we could even consider bringing it in." Should the base rate fall to this level and Halifax opt to impose the collar borrowers who are unhappy with the decision can move their loan. "We will give borrowers at least three months to move without facing redemption penalties," says Hemingway. The new restriction, which doesn't apply on mortgages taken out before November 2002, is designed to protect savers at the bank, says Hemingway. "There are two sides to the balance sheet - to finance the mortgage we need savers and we have to be able to pay them interest," he says. This, says Hemingway, works both ways - Halifax has also added a cap to its tracker so if rates rise to double figures borrowers will not necessarily see their pay rate rise to the same level. The level of the cap has not been specified. Lenders still have the final say over the rates then? It seems so - which is ironic as trackers are usually considered to be the most transparent of mortgages. Rob Clifford, managing director of broker Mortgageforce says this transparency was originally the appeal of this kind of deal. However it is becoming apparent caveats and small print can make tracker deals less "see-through" than they might originally appear. Why choose a tracker then? Trackers do still have a lot going for them. Most do track every rise and fall in the Bank of England Base rate and even if you choose a loan from Halifax or Abbey National rates have a way to fall before there is any question of a collar. The advantage of tracking a rate other than the lender's SVR is that you can see any rate change coming. when the Monetary Policy Committee announces its decision each month you will instantly know if your next monthly mortgage repayment will be higher, lower or the same as the last. The fact that the MPC's decisions are headline news means that - provided you can remember the margin between your rate and the Bank of England Base Rate - it should be easy to keep tabs on the rate you are paying, "Tracker mortgage suit people who are reasonably financially aware," says Tanya Mills. "They will appeal to people who believe that base rates are likely to reduce during the special offer period." What do you mean by special offer period? At the moment many lenders are offering trackers as they offer discounts and fixed-rates: as a way of running your mortgage in the early years. Sooner or later the interest rate on most deals reverts to the SVR. For instance, at Yorkshire Building Society there are tracker deals that last for two or five years and at Nationwide Building Society there are two and three-year deals. However, borrowers who do want to track the base rate for the full term of their mortgage can do so. Newcastle Building Society is among the lenders who can help. It recently launched an offset deal which tracks the Bank of England base rate for as many years as you keep your loan. For the first six months the pay rate is 0.10 per cent below the base rate, then it reverts to 0.50 per cent above the base rate for the rest of the term. These are all base rate trackers - what about the LIBOR trackers you mentioned? The LIBOR rate is the rate at which banks lend funds to other banks. It is compiled by the British Bankers Association and released to the market each morning. Skipton Building Society's Stateside Tracker mortgage follows the three-month US Dollar LIBOR rate - the rate at which banks lend dollars. This rate is adjusted every three months and the pay rate on your mortgage can only be changed at this point - this makes it theoretically more stable than a base rate tracker. The interest rate on the Skipton deal depends on the size of your mortgage - borrowers who take up to 85 per cent loan to value (LTV) pay the LIBOR rate plus 1.80 per cent for five years - a current pay rate of 3.23 per cent. Those who borrow up to 95 per cent LTV pay 1.95 per cent above the LIBOR rate for the same period - currently 3.38 per cent.. 
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