Bank of England Base Rate

• The base rate is the interest rate set by the Bank of England, the United Kingdom's central bank. The interest rate is the borrowing terms set by the Bank of England when lending to commercial banking institutions, such as the ones that issue mortgages, loans and savings accounts. It is similar to the overnight loan rate set by the Federal Reserve in the United States. Lending institutions price their products based on the base rate. Loans and mortgages have a higher interest rate than the base rate, while savings and investment products have a lower interest rate than the base rate.
  
  

Tracker Mortgages

• A tracker mortgage is one that is linked to the Bank of England base rate. When the base rate fluctuates, the interest rate on the mortgage will move with the base rate. This provides an incentive to the borrower, as he will know that the mortgage's interest rate will not rise too high. The specific interest rate often is the base rate, plus a margin fixed for a certain period of time. Some mortgages are tracker mortgages for the entire lifetime of the loan, whereas others offer tracker terms for an introductory period from two to 10 years.
  
  

Comparison with Fixed-Rate Mortgages

• A tracker mortgage may be tempting, especially when the Bank of England base rate is expected to fall. Fixed-rate mortgages are another popular mortgage option in the United Kingdom. They instead offer a fixed interest rate for the lifetime of the loan. Even if the interest rate on a fixed-rate mortgage is higher at first, it sometimes is a better option in the end as there is no risk of the interest rate increasing. Some people who have taken out fixed-rate mortgages at an initially higher rate have found they saved money over those who took out a tracker mortgages with an initially lower rate.
  
  

Collars

• Several precautions must be taken before taking out a tracker mortgage. In addition to variable rates and introductory offers, a potential issue with the tracker mortgage is the collar, which stipulates that the interest rate on a tracker mortgage can never be below a certain rate, even if the Bank of England base rate falls to a corresponding level. Often, collars are written in the small print of a mortgage agreement.