Pete Mugleston | Mortgage AdvisorPete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.
Updated: 18th September 2019 *
Getting a mortgage is a huge financial commitment, so it’s important to understand what type of mortgage is going to give you the best interest rate. So, if you’ve been wondering what the difference is between a fixed-rate and a tracker mortgage, or which type you should get for your circumstances, it’s always advisable to seek professional advice.
In this guide, we outline the main differences between fixed-rate and tracker mortgages, so you can make an informed decision about which product may be more suitable for you.
What is the difference between a fixed-rate and tracker mortgage?
Some financial experts say that a fixed-rate mortgage can make budgeting easier for homeowners, while others argue that the fluctuating rates with a tracker mortgage may help you save money over time.
To help you understand the difference between a fixed-rate and tracker Mortgage, we’ve examined both in more detail below.
A tracker mortgage is a type of variable mortgage that follows an external interest rate known as the base rate.
Usually, mortgage providers will use the Bank of England's base rate to set the interest rate on their own mortgage deals. The Bank of England’s base rate can fluctuate, but at the time of writing it is 0.75%.
Bear in mind that lenders can also add or deduct a percentage of interest on top of this.
So, if you were to take a tracker mortgage, your mortgage rate could potentially increase if the external Bank of England base rate goes up.
This leaves a level of uncertainty for borrowers who are contemplating getting a tracker mortgage, if interest rates go up, the amount they will need to pay on their mortgage could increase to an unaffordable level.
A notable difference between fixed and tracker mortgages is the way that interest rates are calculated.
A fixed-rate mortgage has a fixed rate of interest for an agreed period of time during the mortgage term.
It is not uncommon for some lenders to offer lower fixed rates for the first few years of a mortgage. However, once this period of time has passed, some rates can increase dramatically.
In the event of this happening, it is not necessarily an issue, as you may wish to shop around at the end of the fixed term and see if you can get a new mortgage with a lower rate, or better yet, have one of the brokers we work with do this for you (recommended).
However, when comparing tracker vs fixed mortgages, there are also homeowners that like the predictability of knowing that their rate is secure with a fixed mortgage, as this means that the amount that they pay on their mortgage will stay the same throughout.
This can result in some people paying more on their mortgage than if they had opted for a tracker Mortgage, but this is not always the case.
Will I save money with a fixed-variable or tracker mortgage?
Another difference between a tracker and a fixed mortgage is that is some fixed-rate lenders may charge penalties for early or overpayment.
This can mean that, despite having the additional income to pay off a fixed mortgage, you may have to keep paying off the same amount of mortgage throughout your loan period, meaning you pay more overall.
Some tracker mortgage lenders charge early repayment fees, too. Despite this, tracker mortgages could still be financially beneficial in certain cases.
Should I go for a tracker mortgage?
There will be a different outcome for every person comparing fixed-rate or tracker mortgage because personal circumstances can affect whether one mortgage product is more suitable than the other.
To truly understand whether a fixed rate or tracker mortgage is better for you financially, you would need to talk to a mortgage advisor.
However, as an example, we look at how a drop in interest rates could allow tracker mortgage customers to potentially pay off more of their mortgage.
Tracker mortgage example
Let’s say you had a 25-year tracker mortgage for £200,000 and the interest rates on your loan were to drop from 4% to 3%.
With these figures in mind, your mortgage payments could be reduced by £107.25 each month from £1,055.67 to £948.42. Over a year, this could result in a saving of £1,287.
You could potentially use this yearly saving to pay off more of your overall mortgage. However, first you would need to compare how much your lender might charge you in early repayment fees versus the cost of not overpaying.
You may also want to consider putting away any savings in the event of the interest rate increasing, so you can comfortably afford to keep up with your payments.
Bear in mind that the rates you can get will vary between lenders, although the charge is usually a percentage of the outstanding mortgage debt and often this reduces the longer you have been in your mortgage.
If you are unsure about whether your current tracker mortgage has early repayment charges, check your mortgage contract or seek tracker mortgage advice from a professional.
Speak to an expert here for advice about fixed-rate or tracker mortgages. The experts we work with can compare the costs of each of your options and help you find an affordable solution.
Fixed vs tracker mortgage after Brexit
Many borrowers are worried about how Brexit may affect the economy and therefore the interest rates on their mortgage or mortgage savings.
If interest rates were to increase, this could be good news for those currently saving for a mortgage as their savings accumulate quicker.
However, for those who currently have a mortgage, a hike in interest rates could make their current mortgage payments more expensive.
Some homeowners have already considered switching from a variable rate to a fixed rate before Brexit proceeds, as this would ensure that their mortgage repayments will not increase during the period of the fixed term.
If you’re worried about the impact of Brexit on a tracker or fixed mortgage, speak to an advisor here. They will be more than happy to help with any of your queries and can compare the current deals on the market and find you the best solution.
Speak to an expert for fixed-rate or tracker mortgage advice
The advisors we work with are trained professionals who will only ever recommend mortgage products that are suitable for you and your financial circumstances.
With their years of experience within the industry, they can find and compare fixed-rate or tracker mortgage deals that are affordable for you.
If you want to seek independent legal advice about your tracker or fixed-rate Mortgage, they can also point you in the right direction.
If you have any questions or if you’re still unsure about whether to get a tracker or fixed-rate mortgage, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...