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Interest rates: How low can your mortgage go?

how low will mortgages go

The Bank of England's shock decision to cut interest rates to 3pc will be welcome news to borrowers with tracker mortgages. But some of these loans have a sting in the tail: they stop tracking the base rate once it falls to a certain level.

2:28PM GMT 06 Nov 2008


Trackers are so called because their interest rates go up and down with the Bank of England base rate. But in some cases the lenders stipulate that the rate you pay will not fall below a certain level no matter how low the base rate goes. These minimum rates are called "collars".

Some borrowers with Kent Reliance building society will see the interest rate on their tracker mortgages fall by less than the Bank of England's cut, thanks to a collar. The society's lifetime tracker charges 2.5 percentage points above base rate, so borrowers might have expected to pay 5.5pc after the Bank's move. But there is a minimum payable rate of 6pc on this product. A spokewoman for Kent Reliance said a very small number of borrowers, "probably fewer than 100", would be affected.

Otherwise, no one with a tracker will fail to benefit from the whole 1.5-point cut in base rates because of a collar, experts believe. But if the Bank cuts rates just one more time it could be a different story, as many lenders have set 3pc as the base rate cut-off.

Halifax, for example, has set the minimum interest rate on its trackers at 3pc plus the tracker margin. So a borrower who took out a Halifax home loan with an interest rate of base rate plus 1.75 percentage points, say – who has just seen his payable rate fall to 4.75pc – won't benefit from any further cuts in the base rate.

Nationwide's mortgages stop tracking the base rate when it falls below 2.75pc, while Scarborough, Cumberland and Monmouthshire building societies collar at a base rate of 3pc. Scarborough building society stipulates a minumum payable rate of 3pc on some of its trackers, and some other small societies won't charge less than 3pc or 4pc. The payable rate on a lifetime tracker from Kent Reliance building society has a minimum of 6pc, according to Defaqto, the financial analyst.

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