So you think a rate cut will reduce your mortgage bill?

People on discount deals should watch their lender. By Esther Shaw
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The Independent Online

Homeowners struggling with soaring mortgage bills are taking solace in the prediction that interest rates will fall soon. But brokers are warning that borrowers on variable-rate deals must be on their guard, as there are crucial differences between the two main types, "trackers" and "discounts".

"Tracker-rate mortgages actually 'track' the Bank of England base rate for a predefined term," says Louise Cuming from the price-comparison service "They are completely transparent as they will always move in line with base rate at a guaranteed differential."

Discount mortgages, on the other hand, track the standard variable rate (SVR) of the individual bank or building society.

"Lenders do not have to move it in line with base rate," explains James Cotton from broker London & Country, "and can also opt to change it at any time – even when the base rate is frozen. So you are at the mercy of your lender."

This is significant in the current economic climate, with lenders feeling the effects of the credit crunch and looking for ways to improve their margins.

Earlier this month, Standard Life actually raised its SVR – by 0.15 percentage points to 7.46 per cent – despite the Bank of England leaving interest rates on hold at 5.75 per cent. Brokers are now warning that other lenders could follow suit, and urging borrowers to be on their guard.

Lenders are also likely to be slow to change their SVRs when the base rate comes down, adds Andrew Montlake at broker Cobalt Capital, and they may not pass on the full value of the reduction to borrowers.

Anyone with a mortgage linked to their lender's SVR should consider remortgaging as these deals are currently as high as 8 per cent.

According to Melanie Bien at broker Savills Private Finance, a base-rate tracker is a "much better option" than a discounted deal because there is far more transparency. "Borrowers know exactly where they stand: if there is a quarter-point reduction in the base rate, by the following month your mortgage rate will have fallen by the same amount," she explains.

At the same time, Ms Cuming says lenders are constantly reviewing their tracker rates and reducing the guaranteed differential for new product ranges.

For those interested in a tracker, Mr Cotton picks out a deal from Nationwide building society at 5.58 per cent (0.17 percentage points below base rate for two years) with a £1,499 fee, and one from the Woolwich at 5.69 per cent (0.06 below base for two years) with a £995 fee. By contrast, Newcastle building society has a discounted deal at 5.59 per cent with a £699 fee.

If things go as expected in the next 12 months, borrowers on a product that tracks the base rate, says Mr Montlake, are the ones who will be "smiling the most".

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