Tracking down the best rate

Homeowners are hoping to cash in on the prospect of falling interest rates by switching to tracker mortgages - loans that mirror movements in the base rate. Broker Mortgage Direct says applications for tracker mortgages were up nearly 10 per cent in May from April this year, while those for variable rates were also up 6 per cent.

'The changing trend in the popularity of variable and tracker mortgages reflects that borrowers are more confident that interest rates will drop,' says Peter Gladdy, director of Mortgages Direct.

The lowest rates are offered by short-term trackers, usually running for two or five years. The best deals for a two-year tracker come from Abbey and Portman Building Society both at 0.16 per cent below the base rate. Abbey calculates its interest on a daily basis while Portman's is annual - so the latter will cost you more - but Abbey will only lend up to 60 per cent of the value of the property and Portman will lend 95 per cent. For five year deals, mortgage brokers London & Country say the best on the market come from First Active and National Counties which both track at bank base rate (currently 4.75 per cent). However, the First Active deal has a collar on the rate of 4 per cent, which means that it will not dip below this even if the base rate goes lower, while the National Counties deal has a collar at 3 per cent.

But while short term trackers might be catching homeowners' eyes, is there any value in considering lifetime trackers? With recently increased entry and exit fees on a large number of mortgages, a slightly higher rate over the long term may work out cheaper for some borrowers, say the experts. 'For those with smaller mortgages a lifetime tracker could be a good option. With loans of about £50,000 or less, the fees lenders charge will have more of an impact to the point where borrowers can lose the benefits of regularly remortgaging to a cheaper rate,' says David Hollingworth of London & Country.

Ray Boulger of John Charcol agrees: 'Some lifetime trackers offer very good value. The key is to look at what the margin is between the tracker and the base rate. While you won't get a rate as cheap as those on limited period trackers, if the differential between these products is not too much you might still be better off in the long term. Even those with a big mortgage might find the differential small enough to make it worthwhile, especially if you don't keep track of your mortgage and don't switch to better rates all the time.'

Simon Tyler of the broker Chase De Vere Mortgage Management believes long-term trackers are more attractive than two or five-year tracker deals. 'Short-term trackers don't look fantastic value compared to some of the deeply discounted deals on the market. With two-year discounts available at rates as low as 4.44 per cent, short-term trackers priced at 4.75 per cent or above do not compare well,' he says. 'The real benefit with trackers comes with lifetime deals where the rate is pegged around the base rate for the life of the loan. This is why trackers were invented - to ensure long-term value and prevent the lender from failing to pass on the full extent of any base rate cuts or adding more than any rate rise to your mortgage rate.'

All the brokers cite long-term tracker mortgages from Saffron Walden and Clydesdale as the best deals on the market. The Saffron Walden product tracks at 0.2 per cent over the base rate for life while the Clydesdale product, which is available through selected brokers, tracks at 0.2 per cent over the base rate or 0.25 per cent over if you opt to have your fees paid. John Charcol has an exclusive deal with Clydesdale to offer this mortgage at base rate plus 0.19 per cent or plus 0.24 if you take free valuation and free legal - but you will have to pay the broker's fee. It is also worth noting that Saffron Walden charges interest annually while Clydesdale is daily, making the latter less expensive.

'If you are looking at a lifetime tracker look at both price and fees,' says Boulger. 'And look at whether the mortgage has early redemption charges. It is better if it doesn't as if you do decide to switch then you won't be penalised.'

Tyler says his favourite lifetime tracker is from Abbey, which is pegged at 0.49 per cent above the base rate, giving a pay-rate of 5.24 per cent. 'This loan is fully flexible so can act like an offset mortgage, allowing you to offset any savings against your loan, thereby reducing the amount of interest payable. It also allows you to access those savings at any time,' he says.

Contacts

Chase de Vere 0800 358 5533

Charcol 0800 358 5885

London & Country 0800 953 0304

Mortgages Direct 01206 765599