There are a number of different types of mortgages available. It’s important to try to make sure you choose the right one for you. After all, a mortgage is probably going to be one of the biggest and longest-running financial commitments you ever make. It’s well worth getting it right!
Chances are, you’ve heard of both fixed and tracker mortgages. But what exactly are they and how do they differ? In this article, we’ll discuss the difference between fixed and tracker mortgages to help you decide which, if either, is best suited to you.
Should I get a fixed or tracker rate mortgage?
There are a few differences between fixed and tracker rate mortgages. In fact, they basically sit on two opposite ends of the spectrum. Which is best will totally depend on your personal circumstances and preferences. Whilst a fixed-rate mortgage will generally make budgeting a lot easier month-to-month, a tracker mortgage may save you money over time.
Let’s talk about how each of these mortgages works in a little more detail.
As the name suggests, a fixed-rate mortgage has a fixed interest rate. That means it is guaranteed to stay at that same level for an agreed fixed period. This period could be anything from one year up to fifteen years.
Generally speaking, the longer your fixed-rate deal lasts, the higher the interest rate will be. Once the agreed fixed period of your deal ends, your borrowing will normally be transferred onto the lender’s SVR. Alternatively, you may be offered a new fixed-rate deal.
Although more expensive initially, fixed-rate mortgages are attractive because you know exactly how much your mortgage repayments will be each month, regardless of market conditions. No matter how high the base rate or the lender’s SVR goes, your interest charge and therefore your monthly repayments won’t change throughout the agreed fixed period.
This can be particularly attractive when you first buy a property and have to budget for this substantial monthly commitment, along with the other household bills, plus the cost of furnishings, decoration or undertaking any minor alterations/improvements you may want to make to the property.
Find out more – ‘What is a fixed-rate mortgage?’
A tracker mortgage is a type of variable mortgage. It has an interest rate that moves up and down in line with external market conditions. They are linked to a fixed external economic indicator, usually the BoE base rate or Libor (London InterBank Offered Rate). They move up or down along with changes in these rates, regardless of what the lender’s SVR is.
Whilst tracker mortgages have variable interest rates, they have a fixed element too as they float at a fixed rate above base rate or Libor. For example, the current base rate is 0.5% (as of February 2022) and a tracker mortgage may be set to track at the base rate plus 1%. This means your mortgage rate will currently be at 1.5%. This compares with the average SVR which currently sits at around 3.6%.
Similar to fixed-rate deals, tracker deals will be fixed for an agreed term, usually anywhere from two to ten years. You can even find trackers that last the full term of your mortgage, referred to as a ‘lifetime tracker’. The longer your deal, the higher your agreed interest rate above the base rate is likely to be. Once the fixed term ends, your borrowing will generally move to the lender’s SVR. Alternatively, you may be offered another deal.
Tracker mortgages are pretty popular – particularly in times of low or falling interest rates, as repayments will immediately reflect these. Plus, they are attractive due to their transparency, in that they move in line with economic conditions rather than the commercial decisions of your lender.
Find out more – ‘How much interest am I paying on my mortgage?’
Which is best – fixed or tracker?
So, we’ve explained the major differences between these two mortgage types. Now for the more difficult part – deciding which is best suited to your circumstances.
In a nutshell, a fixed-rate mortgage offers security and stability, with consistent repayments month-to-month for the entirety of the fixed period of your deal. You may be restricted by early repayment charges and penalties for overpayments, but it makes budgeting easier. This might be important to you, particularly in the early years of homeownership when budgets can be tight.
The monthly cost of a tracker mortgage on the other hand is rather more unpredictable. If interest rates rise, so do your mortgage repayments and this could lead to some financial hardship if they rise significantly. On the other hand, you will immediately benefit if interest rates fall, allowing you to save money.
The best way to work out which is best for you would be to talk to a mortgage advisor and broker, such as us here at Mortgage Light. We know the ins and outs of these types of mortgages and are able to tell you all you need to know to make a fully informed decision and ensure you avoid any nasty surprises later down the line. With your financial situation in mind, we can offer unbias advice on which type of mortgage may be better suited to you.
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