Taking out a mortgage is likely to be one of the biggest financial commitments you ever make.
So, finding the type of mortgage deal that’s best for your situation early on in the process can help give you the peace of mind that it’s the right one for you and your circumstances.
But with various options available, it can often be difficult to figure out which is best suited to you and whether it will benefit you in the long term.
Read on to learn about fixed- and tracker-rate mortgages, how they differ, and their various pros and cons.
You should know the ins and outs of each type of mortgage before committing
When you take out a mortgage, it’s normally for the long term, and it can be useful to think as far ahead as you can before deciding on which type of deal to commit to.
This is because there are many different types of mortgages offered by banks and building societies, all catering to people’s different situations.
Most of the time, when you agree to a mortgage deal, you commit to it for a number of years – and so finding the right one for you is very important to ensure the repayments and other benefits suit your circumstances.
So, it’s useful to remind yourself of the basic functions of a mortgage, and how different types of mortgages vary. This way, getting familiar with the different options available could help you to find the right deal.
Fixed-rate mortgage
With a fixed-rate mortgage, you have a set rate of interest over a certain period of time that will not change, regardless of any changes to the base rate or other interest rates across the economy.
The amount you pay monthly with fixed-rate deals is predetermined and doesn’t change.
Often, these deals will cost slightly more than tracker rates as you pay a premium for the peace of mind they offer. This is not always the case, though, and so speaking with an expert can help you to compare the deals that are available.
At the end of a fixed-rate deal, your mortgage will normally revert to the lender’s standard variable rate (SVR) unless you move to a different product.
Tracker-rate mortgage
With a tracker-rate mortgage, the interest rate you pay is pegged to a wider market interest rate, normally the Bank of England’s (BoE) base rate. This means that your repayments may change throughout the term if underlying interest rates change.
As a result, there is no way to guarantee how your interest rate may change from month to month – it could increase or decrease.
This makes tracker rates less certain, as an increase in the base rate will likely see your repayments rise. Indeed, 2022 has been a year of economic turbulence and the BoE has increased its base rate seven times in 2022 alone.
Some tracker-rate mortgage deals do have “collars” that limit how far the interest rate will move. This means your repayments may not fall below a specified interest rate.
Different types of mortgages will suit different circumstances
To understand how each type of mortgage can suit different people in varying circumstances, it’s useful to remind yourself of the pros and cons of each type of deal so you can make the most appropriate choice.
Pros and cons of a fixed-rate mortgage
Pros
- You could lock in a favourable deal if the base rate climbs higher during your term: if the base rate does increase during your fixed-rate deal, your repayments won’t rise, meaning you could save money when compared to a tracker deal.
- You know what you will pay each month: because the interest rate on the funds you borrow from the lender is fixed, you can expect to repay the same amount in each instalment during the term. This enables you to budget with confidence.
- During your fixed-rate deal, your payments won’t increase: you can be sure that you’re protected from any unexpected increase to your repayments.
Cons
- If the base rate drops, you still pay the same amount: at the time, your fixed rate deal may be attractive compared to the base rate. However, if the base rate decreases during your fixed-rate term, you will continue to pay the same amount while tracker deals may become cheaper.
- Early repayment charges may be applicable: many fixed rates come with an “early repayment charge” (ERC). If you pay off some or all of your mortgage within the fixed-rate period then you could pay an additional charge – up to 5% of the amount you repay in some cases. However, most lenders will allow you to pay up to 10% of your outstanding balance each year without an ERC.
- Arrangement fees could be more expensive than other types: fixed-rate deals could have set-up fees that are higher than tracker-rate mortgages.
Pros and cons of a tracker-rate mortgage
Pros
- You could save on repayments: if the BoE’s base rate decreases, the interest rate on your loan will also decrease, relative to the base rate’s movement. This could see your repayments fall.
- Introductory rates often offer some of the cheapest rates available: some tracker-rate mortgages have introductory deals for an initial period that could be cheaper than most other mortgages. So, if you’re looking for the very lowest initial payment, a tracker-rate may be an option.
- Many tracker rates are flexible: many tracker-rate deals are flexible, meaning you won’t pay an ERC if you decide to repay a lump sum to your mortgage.
Cons
- Payments could go up without warning: if the BoE’s base rate increases, your interest rate will also rise, resulting in higher monthly repayments.
- Introductory rates are only temporary: introductory rates are often some of the cheapest around. However, they are normally only temporary and usually involve switching to a higher-paying deal once the introductory period ceases.
Get in touch
If you’re deliberating on which type of mortgage you think is best for you, we can help you. We can discuss your options with you and search the market to find the deal that’s most appropriate for your current and future circumstances.
Please get in touch. Email info@oundleandstamfordmortgages.com or call us on 01832 275828.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Think carefully before securing other debts against your home.
You may have to pay an early repayment charge to your existing lender if you re-mortgage.
