A Tracker mortgage is one where the mortgage rate is specifically set at a certain discount to the Bank of England base rate.
For example, the Woolwich have a tracker mortgage which is fixed at 0.06 below base for two years. This means the current rate is 5.69 per cent (There is a £995 fee setting up fee). Therefore, if the base rate falls next year by 0.5% you can guarantee that your monthly interest rates will fall by 0.5%.
However, with a Variable mortgage your interest rate depends on the Banks Standard Variable Rate SVR. There is no guarantee that the bank will reduce this in line with the base rate. For example, Standard Life, recently increased its SVR by 0.15%. Given the current credit crisis, it is becoming more difficult for banks to borrow. The general cost of borrowing is rising, therefore, they are looking to pass these costs on to consumers in the form of higher SVR.
Therefore, if interest rates do fall next year (as predicted) banks may be quite slow to pass the reductions on to consumers. They could even reduce rates by a smaller amount than the Bank.
In the current economic climate tracker mortgages are likely to offer better value than standard variable mortgages. However, in the long term, when the credit crisis is resolved, competitive pressures should mean that standard variable rates should change by a similar amount.
The relatively high set up fee for tracker mortgages means they are likely to be more effective for people with large mortgages
