How cheap could my mortgage become?

26 January2009

With the base rate recently falling for the seventh consecutive time - and the fourth time in as many months - there is inevitably speculation as to just how low mortgage rates could fall. While at the height of the market the best mortgage rates on offer stood at around 6% to 7%, some mortgage lenders are now offering rates of closer to 4% or 5%.

Of course, that doesn`t account for existing homeowners who agreed tracker mortgage deals when the interest rate margin (the amount above the base rate at which a tracker mortgage moves) was lower. For some homeowners, the potential for a 0% interest rate is becoming a realistic possibility.

Mortgage collars

To protect against mortgage rates falling too low, many lenders set 'collars` on their tracker mortgages, preventing the interest rates from falling below a certain level. With the base rate falling to 1.5% in January, many homeowners have already reached their mortgage collar.

The extent to which this is a problem varies, depending on the interest rate margin. Newer homeowners typically face higher interest rate margins than at the height of the mortgage market in 2007, when some tracker mortgages were even set at a small amount below the base rate. However, many of those with mortgage collars are now finding their mortgage payments will not fall any further.

What about those without mortgage collars?

If your mortgage deal does not carry a collar, then you could find yourself paying a very low interest rate, since your rate will continue to fall in line with the base rate.

Ray Boulger of mortgage brokers John Charcol has suggested that if the base rate falls to 0%, banks would have to pay interest to the mortgage holders whose mortgage tracked below the base rate. However, a spokesperson for Lloyds TSB denies this, telling The Telegraph that interest on mortgages refers only to what is paid to the lender itself.

If you are unsure whether your mortgage carries a collar, it`s best to contact your lender to find out - and if it does, consider whether remortgaging might help you find a better deal.

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