As interest rates continue to rise and the cost-of-living places increasing pressure on household budgets, we look at the differences between tracker and fixed rates to help you assess which option might be right for you.
What is a tracker mortgage? A tracker mortgage is a type of variable rate, which tracks (or moves in relation to) the Bank of England’s official borrowing rate (known as the base rate), with a fixed premium added on top. For example, it could be ‘Base Rate +1%’, which means you will always be charged 1% above the base rate.
What are the factors to consider with a tracker mortgage?
• Tracker interest rates are currently sitting below average fixed rate deals. This means, if the base rate stays the same or reduces, your rate will likely be cheaper than a fixed rate product.
• Most tracker rates have no penalty periods. So, if rates start to climb, you could switch to a fixed rate product without a charge.
• Your mortgage payments could fluctuate depending on what happens with the base rate.
• If rates start to climb and you opt to move to a fixed mortgage, it’s possible your fixed rate will be higher than it is today, so it’s important to weigh up the financial implications that may be involved.
What is a fixed mortgage? As the name suggests, fixed rate mortgages have a fixed interest rate for an agreed period of time (usually two, five or 10 years) during your mortgage term. For example, you could agree a 4%, five-year fixed-rate mortgage, which would charge 4% interest a year, for five years.
What are the factors to consider with a fixed-rate mortgage?
• There won’t be any surprises. You’ll know your exact monthly mortgage costs for the length of your term, so you can budget accordingly.
• Your interest rate will not climb during your term.
• If rates fall, your mortgage is fixed so your payments will not decrease.
• Fixed rates are currently more expensive than tracker rates, although the market is changing rapidly.
• If you want to exit early or pay off a lump sum outside your agreed terms, you will usually be charged a penalty.
Which is the right option for you? That’ll depend on your circumstances. Whether or not a tracker is the right choice for you is based on a number of highly personal factors, from your appetite for risk to the size of your financial buffers in case interest rates move higher than you expect. An experienced mortgage broker can help you assess which is right for you.
If you are looking to for a new deal and would like to discuss your options, contact our expert team who would be happy to help. We have access to over 200 lenders, and can help find the right mortgage for your circumstances.