Forget Fixing And Take A Tracker

Tracker rates are a no-brainer for Foolish borrowers.

The Bank of England is under increasing pressure to cut the base rate to help the housing market. So -- despite inflationary pressures -- it looks like the only way for interest rates is down.

But how does this determine the type of deal you should choose on your mortgage?

When you decide how you want interest to be charged you have two choices; whether you want your rate to be set at an agreed level, or able to move up and down in line with the Bank of England Base Rate.

A mortgage that is set at an agreed rate is a fixed rate mortgage, and you can fix the rate for anything between one and 25 years

A rate that is able to move up and down could be your lender's standard variable rate, a discounted variable rate or a tracker rate.

When rates are rising, many people go for fixed rates in order to lock in to a particular rate, protecting themselves from base rate increases.

In March last year, for example, when we were in the middle of a series of base rate increases, 76% of borrowers flocked to the safety of a fixed rate. Just 6% took a discounted variable rate and 13% went for a tracker, according to the Council of Mortgage Lenders.

How low can they go?

By March this year, in a decreasing interest rate environment, the figures had changed significantly. Just half of all borrowers decided to fix their rate -- a drop of a third -- and the number of people taking out variable rates doubled, with 10% going for a discounted rate and 31% opting for a tracker.

This makes perfect sense. If rates are going down we want the option to benefit from further drops -- and a discounted or tracker rate allows us to do that.

But remember, in the current environment some lenders are not passing on rate cuts in full to borrowers on their standard variable rate or discounted variable rates. This allows lenders to shore up their own profit margin.

With a tracker your rate moves at a set margin above the base rate, offering complete transparency and meaning lenders cannot choose whether or not to pass on a cut -- they simply have to.

Save now

Variable mortgages are among some of the most competitive on the market, so those looking for the cheapest way onto the ladder are drawn to trackers and discounted rates.

For remortgagors, Barnsley and Mansfield Building Societies both have tempting discounts at 5.69% and 5.65% respectively -- these are incredibly low rates at the moment.

First Direct, Woolwich and HSBC are stealing the march on the best value trackers at under 6%, and these are available to first-time buyers too.

Low fees

The arrangement fees are often more expensive with fixed rates, costing around £1,000.

By comparison the fees on discounted rates tend to fall to between £250 and £600, while fees on tracker rates are the lowest of all -- usually less than £350. In fact many tracker deals have no arrangement fees at all.

For those taking out relatively small mortgages (£150,000 or less for example) the size of your fee is extremely important. You could search high and low for the cheapest mortgage rate only to find your saving wiped out by an enormous fee.

For example:

Monthly repayments on a 25-year £150,000 repayment mortgage at 5.99% are £965

At 5.49% the monthly repayments drop to £920 -- a monthly saving of £45

Over a two-year period the lower rate would save you £1,080, but this would be completely cancelled out by many arrangement fees in the current market.

No ties-ins

One of the most important features of a mortgage is whether it leaves you free to move. Let's face it, competitive mortgage deals are hard to find at the moment, lenders' criteria is tight and mortgages are more expensive than they have been for the last few years.

Having the freedom to take a deal that is the `best of a bad bunch' and then leave when the time is right could be very important.

If you take out a two-year fixed rate, it is highly likely you will be tied into the deal for those two years with Early Repayment Charges (ERCs). You are technically free to leave the deal but it will cost you dearly to do so.

Discounted mortgages also apply ERCs within the discounted period -- so if you take a three-year discounted rate you'll be tied to that rate for three years.

But with many trackers there are often no ERCs at all. Leave the deal whenever you want and you won't be penalised.

In addition, you will not have lost out too much with your upfront costs since arrangement fees are so much lower than other types of deal, or non-existent.

And because trackers are so keenly priced -- with many pegged at just 1% above the base rate or less -- it seems likely they will remain competitive for the longer term. With a deal this good, you may not need to switch at all.

In a nutshell, trackers are competitive now, likely to stay competitive if rates fall, can be free to set up and free to leave. Why would anyone take any other type of deal?

More: How To Guarantee A Great Remortgage

> Why not use an independent mortgage broker like The Motley Fool Mortgage Service to search the market for your perfect deal?