Mortgage Collars on Tracker Mortgages

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Mortgage Collars on Tracker Mortgages

A tracker collar means that a mortgage rate cannot decrease too much irrespective of what happens to the base rate. Collars have been relatively overlooked in the past, simply being part of the small print.

However, now that rates are falling so quickly and by such large amounts, they are beginning to become greatly regarded as a condition set out by your mortgage provider to check before signing anything.

A collar ensures that even if base rates fall to 0% (which is potentially a possibility) some borrowers will still have to pay on average 3% interest on their mortgage repayments. This is in order to protect the lender from mortgage rates dropping too low.

Consequently the whole idea of a tracker mortgage is coming under fire, as they will no longer be doing what they are supposed to do - if they are no longer able to follow the base rate.

There is a large amount of variation amongst different lenders, for example, the Nationwide has a collar of 2.75% which means once the base rate falls below this point the cuts will not be passed onto its tracker rate customers.

Similarly, the Halifax has a collar of 3%; they reserve the right if base rates drop to this beyond this point to amend the margin over base rate their tracker lies.

However there are some lenders like Barclays whose life time tracker mortgages do not have a collar (though if considering this Barclays trackers track the Barclays bank not the Bank of England). In a similar way, the Abbey has a collar on its more recent deals which ensures borrows pay a minimum of 0.001 percent interest.

How do I find out if my mortgage has a collar?

It may be obvious but reading the clauses of your mortgage particularly if you are taking out a new mortgage will help you to understand if your tracker mortgage has a collar and under what circumstances it will come into use. Alternately, you can contact your mortgage provider directly for specific detail of your mortgage and how a collar will affect you and your mortgage repayments.

How can I avoid a Mortgage Collar?

Read carefully and ensure you understand the clauses set out in your tracker mortgage here it should tell you if your mortgage lender has a collar and have details on how low the base rate will have to drop before the collar takes effect.

Mortgage providers should have an obligation to write to their customers informing them of changes to their deal and tracking margin, in addition to this you should also be granted a penalty free period to find an alternative provider.

An alternative solution is to change to a Fixed Rate Mortgage; this would fix the interest rate at a certain point at which it remains for the duration of the loan. This could be an option if you are concerned with fluctuations and need the certainty guaranteed by a fixed rate. Long term fixed rate mortgages can even last as long as 25 years.

A Discounted Variable Rate Mortgage has an interest rate where a discount is applied to the lenders standard variable rate for a set period. As the lenders standard variable rate moves up or down, the discount rate moves by the same amount.