Tracker mortgages are linked to the Bank of England base rate – the country’s official rate of interest. As such they will mirror any changes. So if the base rate was to go up by a quarter of one percent your mortgage rate will go up by the same amount. Similarly, if base rate was to fall by a quarter of one percent your mortgage rate would go down.
Discount mortgages on the other hand are linked to the lender’s standard variable rate – known as the SVR. As such any changes are at the lender’s discretion. Generally, banks and building societies will change their SVRs when base rate changes. However, there is no guarantee that the SVR will move by the same amount.
Lenders often use this as an opportunity to widen their profit margin. So if base rate falls, the full cut may not be passed on to the SVR or if the reverse happens and it rises, the SVR could go up by more than the base rate increase.
In fact, when the base rate fell from 5.00% to 0.50% between October 2007 and March 2008 only one of the country’s 20 largest lenders passed on the full 4.50% cut to its SVR.
Therefore trackers are seen as more transparent and are regarded often as being fairer for the borrower.
There are a couple of nuances to watch out for though: a ‘cap’ or a ‘collar’.
A cap is positive as it limits the extent to which your mortgage rate can rise. For example, if you are currently on a tracker paying a rate of 2.50% but it has a 6.00% cap, you would be protected if the base rate rose by more than 4.50%.
A collar on the other hand is potentially negative and it means the lender doesn’t have to reduce your mortgage rate beyond a certain level.