Sam Dunn: 'Why are trackers so expensive after the base-rate drop?'

Question: I've decided to switch to a base-rate tracker when my three-year fix ends in January, but I'm staggered to see that trackers are really expensive; I thought that with falling interest rates, it'd be cheaper. Why can't I get a decent deal? FR, Milton Keynes

Answer: Amid all the financial gyrations, even the simplest of products have fallen victim to the events.

Fixed at a set number of percentage points above the Bank of England base rate, trackers cost more when rates rise, and less when they fall. But, as you've discovered, the laws of tracker gravity have been skewed for those hoping for lower mortgage payments.

Thanks to the atrocious lending climate, new tracker borrowers are finding themselves pegged further away from the base rate as banks cover their backs.

So while interest rates slide, most lenders are so far refusing to pass on the full value of these cuts to those seeking new tracker deals.

"Lenders are pricing in risk more than they did in the past," says Melanie Bien of broker Savills Private Finance. "The lack of confidence and reluctance to lend to each other is keeping Libor (the rate at which they lend to each other) high."

Most banks will also want to protect their margins as well, she adds.

In late summer, borrowers with at least a 10 per cent deposit could still bag a decent tracker at 0.98 per cent above Bank rate but some of today's offers are as much as 1.89 per cent above – nearly a whole percentage point higher.

Only last week, Abbey hiked the size of its percentage point "rate" above base rate on its new two- and three-year trackers by up to 0.5 percentage points – to 6.29 per cent – ahead of the interest rate fall.

Elsewhere, others decided to temporarily withdraw their tracker rates: Northern Rock, Cheltenham & Gloucester and the Woolwich all pulled their deals out of the market.

Although the lenders point the finger at competitive pressures, there's no mistaking the mood: if you want a tracker today, expect to pay a much, much higher price for it.

And that's not your only worry, warns David Hollingworth at broker London & Country.

Take out a tracker and, even if Bank rate does fall through the floor to as low as 1.5 per cent or 2 per cent, you could still sneakily find yourself paying more thanks to its "collar".

"If you've already got a tracker, double-check the small print for what's called a 'collar' – the interest rate below which your own tracker rate won't fall," he says.

For example, HBOS has a collar at 3 per cent, whereas Nationwide has one at 2.75 per cent; in both these cases, you won't benefit even if rates sink lower than this.

Others such as Alliance & Leicester don't – for now, at least – impose such restriction, so keep a close eye out.