Find safety in trackers

Tracker funds have been one of the investment success stories of the past decade, and now the concept has been extended to home loans - but instead of shadowing a stock market index such as the FTSE-100, tracker mortgages follow the ups and downs of the Bank of England base rate.

With a tracker loan, the rate you pay is set a fixed amount above the base rate, which is currently 6%. This margin is typically 0.75%-1.5% above the base rate, though it can be as high 2%. When the base rate goes up or down, so does what you pay.

Tracker mortgages burst on to the scene less than two years ago, and last summer they seemed to be everywhere. Now people do not seem to be shouting quite so loudly about them.

Abbey National, Britain's second-largest mortgage lender, says most bank and building societies are testing and trailing them, although a spokesman adds: "I don't think anyone is selling them in great volumes." But it has included a tracker element in its new flexible mortgage.

The simple reason tracker loans are not such hot news is that interest rates have been rising and mortgages that promise to pass on the full amount of any increase are not flavour of the month. The clamour for trackers comes when rates are falling.

But some experts reckon that the time could soon be very right indeed for trackers. While the forecast is for one or two more interest rate rises this year, economists still predict that in the longer term they are likely to fall sharply. As soon as we hit the start of the downwards cycle, trackers will catch on again.

When rates do start to fall, we are likely to see a rerun of last year's debate about lenders not passing on rate cuts, according to Siobhan Hotten at mortgage brokers John Charcol.

Many readers will recall that a number of lenders denied their borrowers the full benefit of interest rate cuts in April and June 1999.

If this happens again, it will heighten tracker appeal because you cannot be diddled out of your rate cut.

For this reason, trackers have won the government's seal of approval. In drawing up new voluntary minimum Cat standards for mortgages, details of which were announced this week, ministers have said that to make the grade, variable rate mortgages must never be more than two percentage points above the base rate.

"Trackers are very much here to stay," says Ms Hotten. "I wouldn't be surprised if we start to see more and more of these products come onto the market. People do like the clarity that they bring."

But not all trackers work in the same way With some, the rate is guaranteed to stay a certain amount above the base rate for the life of the mortgage, while others only guarantee to track the base rate for a few years.

But the industry has been unable to resist tinkering with what was originally a simple concept, and adding bits here and there.

John Charcol is offering an exclusive tracker deal, funded by the Halifax, where you pay the bank base rate minus 0.26% for two years, giving a current payment rate of 5.74%, then for the next three years you pay base rate plus 0.95%.

The deal is available to those who can pay a deposit of at least 10%, and there is no lender's fee and no redemption penalties.

There are a number of deals around that combine a tracker with a cap. These have been designed to give people some protection from rising rates.

This sort of loan may appeal to those people who reckon we will see further interest rate rises in the short term but then are likely to see them falling.