What is a mortgage collar?

If you`ve been keeping an eye on the mortgage market in recent weeks, you may have heard a new term: `mortgage collar`. A mortgage collar, also known as a `mortgage floor`, is a lower limit on the amount of interest you pay on your mortgage.

While mortgage collars have existed for some time, many homeowners have only just become aware that they existed. Most lenders set a limit as to how low rates on tracker mortgages can fall - normally around 2 or 3% - and only recently have interest rates become low enough for these mortgage collars to become active.

Because the base rate has now fallen to 2%, an estimated 1.2 million homeowners on tracker mortgages have found that their mortgage rates will not fall any further, regardless of future base rate cuts.

What if I didn`t know about my mortgage collar?

Since 2004, mortgage lenders have been required to provide a pre-sale KFI (Key Facts Illustration) detailing the terms of the proposed mortgage contract. If your KFI did not mention a mortgage collar, you may be entitled to challenge it - and some homeowners have successfully done just that.

If you were properly notified, and your KFI does mention a mortgage collar, the terms will stand and your rate will not be able to fall below the level stated in your mortgage contract.

Several lenders however have recently lowered their mortgage collars, while other lenders have removed theirs entirely - meaning that their mortgage rates could continue to fall with future base rate cuts.

Are tracker mortgages with collars worthwhile?

Tracker mortgages can still offer excellent rates, regardless of whether they carry a mortgage collar. They typically carry lower rates than fixed-rate mortgages at any given time, and since the base rate is predicted to fall further, your mortgage rate could still fall (though only as far as your mortgage collar will allow).

Of course, before choosing your mortgage you should always seek mortgage advice from an expert. Another type of mortgage, such as a fixed-rate mortgage, might be better suited to your circumstances.

Tags: mortgage, mortgages, mortgage collar, mortgage collars, what is a mortgage collar

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