Fixed Rate Vs Tracker Mortgage

In the current financial climate, knowing what type of mortgage to take out has never been more important. A fluctuating political and economic landscape can have huge ramifications on the cost of living and borrowing caused by the effect on interest rates.

Learning more about the differences between a fixed-rate mortgage and a tracker is wise if you’re considering the best option. While it’s always advisable to get professional guidance from an impartial broker, it’s worth doing some research to inform yourself, too.

What’s the difference between a fixed-rate and a tracker mortgage?

Essentially, the interest you pay on these two products and the features associated with each are what sets them apart.

• A fixed-rate is exactly what is said on the tin: you take out a mortgage with a guaranteed rate for a specific period of time. You will know in advance exactly how much your monthly payments will be from the start of your term to the end of it – usually two, three or five years, or in some cases even longer.
• A tracker mortgage is more changeable. It ‘tracks’ an external marker (usually the Bank of England’s official rate of borrowing), which can go up, down or remain the same. Lenders will then set their own rates accordingly, and you’ll likely pay a set percentage of interest on top of the base rate, depending on what deal you get.

Which one is the better option right now?

The current economic uncertainty has seen the Bank of England raise its base rate, which has inflated mortgage rates. This has affected product types across the board, including new fixed-rate deals and tracker mortgages.

If the base rate comes back down over the next 12 to 18 months, tracker mortgages could be more attractive for those willing to take that gamble. A fixed-rate deal would be better for those who prefer peace of mind knowing what their mortgage repayments will be every month.

There will always be pros and cons of different products, but your own circumstances, prospects, attitude to risk, and security all come into play when answering this question. This is where the support of a reliable and experienced mortgage advisor is invaluable when making these huge decisions.

How a broker can help you decide which is best for you

Understanding the economy’s impact on mortgages is the bread and butter of mortgage brokers, which means they are up-to-date with exactly what’s going on in an ever-changing situation. They follow what the lenders are doing, what’s going on with interest rates, what’s likely to happen next, and what the effects are on borrowers.

Approaching a broker and talking through your circumstances and your aims can bring a huge amount of clarity—what are the advantages and disadvantages of the different product types, and what moves might be best for you now and in the future.

While they won’t produce a crystal ball, an experienced broker will be able to provide advice and in-depth insight into tracker mortgages, fixed-rate mortgages, and other options, too.

Which one is the cheaper option?

As we’ve already outlined, the gulf between tracker and fixed-rate deals has widened significantly in a very short time. However, several factors need to be considered to determine which one is the most cost-effective option for you.

While you’d likely be paying less per month today with a tracker, there is always the risk that rates will rise even higher, leaving you gambling if you don’t fix. Then, you will be at the mercy of a higher tracker and, therefore, higher mortgage repayments.

However, fixed rates are no longer the safe option they were, either. If the base rate drops during your mortgage term, you could be locked into paying a very expensive mortgage for no reason.

The markets have yet to make long-term moves, so it’s difficult to say for certain how lenders will respond and what kinds of deals will be available going forward.

Can you switch from one to the other?

Yes, in theory, you can take control at any point and change to or from a fixed-rate mortgage. However, the reason we talk about doing your homework ahead and taking a ‘risk’ is that this comes at a price.

Both fixed-rate and tracker mortgages involve entering into a contract that you’re locked into for a certain length of time. If you leave a deal before the term ends, your lender might charge you a penalty, as many deals come with early repayment charges.

This doesn’t mean you should avoid switching at all costs. It’s always worth doing your sums and talking to your broker to calculate whether you’d still be better off by exiting early, even with a penalty. There may be instances where this is the case if your current mortgage is unnecessarily expensive or if the economic situation changes dramatically again.

What other options are available?

There are several other mortgage types you could look into while you’re exploring what might suit your circumstances. If you’re in the introductory rates period of an existing mortgage, you could speak to a broker about whether it’s worth moving onto your lender’s standard variable rate (SVR) in case rates drop soon. This can be risky and is not advised without taking professional advice first.

They also follow the base rate, but lenders set their own rates, which can be expensive. If interest rates are cut, however, this would be good news for your repayments, and they don’t come with an exit fee attached, which might free you up for taking out good deals you come across at any point.

There’s also a discount mortgage to consider, which involves a special offer on an SVR for a certain amount of time. Lenders still interchange these deals, and they come with a fair amount of risk, so it’s worth reading the small print on these deals carefully.

Get matched with a broker experienced in both fixed and tracker deals

Whether to go for a tracker or fixed-rate mortgage right now is not straightforward. Getting the support of an experienced and impartial broker with five-star credentials and contacts across the industry will help you find the best deal.

In addition to considering your unique situation, the specialists and brokers we work with will help you understand the different features of each product and assist you with securing the right mortgage when the time comes. To get matched with the right professional, contact us today for a free initial consultation at 0330 818 7026 or make an online enquiry today.