FISCUS MORTGAGES - INFORMATION AND ADVICE

Tracker Mortgage

The tracker mortgage is a very popular mortgage product in the UK and is based around the Bank of England's base-rate.

Once a month, the Bank of England Monetary Policy Committee (MPC) meets and decides on an interest base-rate for the following month. If you have a tracker mortgage, it is this meeting that will decide your interest rate; lenders will set there rates at a fixed margin above the base rate, typically within a 1% window above the Bank of England's "repo" rate.

This type of mortgage is a good idea when the Bank of England's repo rate is stable or falling. However, with each interest rate rise, there is a corresponding increase in your monthly repayment. This means a rising base-rate can have a significant impact on your monthly disposable income.

At time of writing ( 16 April 2004 ), the current base rate set by the MPC is 4% and seems likely to rise to 4.25% for the month of May 2004. This means that a tracker mortgage which was, say 4.75%, would probably rise to 5% in May.

To compare the leading tracker mortgages available in the UK, our tracker mortgage tables are an invaluable resource for indivduals "shopping around" for the best deals on base rate tracking mortgages.

BASE RATES AFFECTING MORTGAGE REPAYMENTS

The underlying problem with this type of interest rate product is the uncertainty surrounding the MPC's decision on base rates. Although there are many observable signals that lead to pretty accurate predictions of changes in base rates, the duration of a mortgage (up to 30 years) means that it is impossible to provide accurate forecasting for the life of the loan. There is also the possibility of a "shock" to the economy, which in turn may lead to a rapid movement in interest rates.

Even without any shocks, a slow increase in interest rates would see a gradual swelling of mortgage repayments. This could put a lot of pressure on a homeowner with a tracker mortgage, as it lowers their "take home pay". One way to protect against this is to obtain a fixed or capped mortgage. However, these types of mortgages will charge a slightly higher interest rate; a premium for the added security of knowing there is a limit to the increase in monthly repayments.

WHY THE BANK OF ENGLAND BASE RATE CHANGES:

However an economist would argue that the MPC focuses principally on inflation when deciding upon the correct repo rate. High inflation, broadly speaking, is caused by a stronger than expected economy, and this results in an increase in the interest rate. Conversely, a weak economy sees lower inflation, and so the bank is prepared to stimulate the economy by lowering interest rates.

This stimulus is linked to the mortgage effect described earlier, as much as anything else. If the economy is performing poorly, lowering interest rates lowers tracker mortgage repayments. This leads to an increase in disposable income, and in theory, leads to an increase in consumption. This effect should therefore boost the economy. The effect works the other way round when the economy is booming.

It could therefore be argued that a higher interest rate occurs during a strong economy, and as such, should not affect anyone too adversely - after all, everyone is meant to be on high streets and in shopping malls up and down the country spending lots of money, causing the boom in the first place. In practice however, there will always be exceptions, and individuals that are struggling to get by during a time of healthy national growth may struggle if there is an increase in interest rates.