In the current financial climate, there’s never been a more important time to understand your options when it comes to types of mortgages. And so, the common question of the hour seems to be – should I choose a tracker mortgage or fixed-rate mortgage?
First, let’s demystify these two popular mortgage types – the fixed rate and the tracker mortgage:
What is a Fixed Rate Mortgage?
First up – the fixed-rate mortgage, the key feature of which is stability, as your interest rate and in turn your monthly repayments stay the same throughout the fixed period. The fixed period can vary, with the most commonly available products being over 2 or 5 years. A fixed mortgage is perfect for budgeting as you’ll know exactly how much you’re paying each month for the duration of the term.
If the Bank of England base rate (which is currently at 5%) drops, you could be left paying more than you would on a variable rate. However, should rates rise, you are protected from this during the fixed term. A further factor to consider is that a fixed rate mortgage ties you down for a specific period and in turn means that an early exit could incur early repayment charges
What is a Tracker Mortgage?
A tracker mortgage is one that will ‘track’ the base rate plus a percentage of interest set by your lender. If the base rate remains stable or falls, your mortgage payments will follow suit. However, it’s a double-edged sword. Should the base rate continue to increase, as it has consecutively since 2021, your payments would become more expensive with each increase. A tracker mortgage is a variable rate mortgage, and with variation comes unpredictability.
A tracker mortgage can also offer you flexibility, some tracker mortgages will not have any early repayment charges so can often be used as a short-term solution with a view to your circumstances changing in the near future.
Making the Choice: Fixed or Tracker?
Both have their benefits and drawbacks, and the better choice depends on your personal finances and lifestyle.
Here are a few factors to consider:
- Attitude to Risk: If stability and predictability is a non-negotiable, then a fixed-rate mortgage is going to be the right choice for you. You’ll have the comfort of knowing exactly what you’ll pay each month. But if you’re comfortable with a bit of risk and the idea of potentially lower payments is appealing, a tracker mortgage might be up your street, just ensure you have the funds to make higher payments, should interest rates increase.
- Economic Outlook: Keeping an eye on the economy can help. If economic analysts predict a rise in the base rate, locking in a fixed-rate mortgage can shield you from likely increased costs. But, if the outlook suggests low or decreasing rates, a tracker mortgage could be your ticket to savings.
- Budget Flexibility: Consider your personal budget. A fixed-rate mortgage may be beneficial if you have a tight budget and cannot afford fluctuations. A tracker mortgage might suit you if you have some wiggle room and can handle potential increases in repayments, which may pay-off in the long-run.
In conclusion, choosing between a fixed-rate or a tracker mortgage right now is not straightforward, but ultimately comes down to your personal circumstances, your financial stability, and how much risk you’re willing to take on. There’s no one-size-fits-all solution, as there are pros and cons to each product, but your own circumstances, prospects and attitude to risk and security must all be considered when it comes to answering this question.
Remember, it’s always wise to seek advice from a reliable and experienced mortgage advisor who can guide you based on your specific needs and circumstances, their advice can be invaluable when making these decisions. As a mortgage broker, we are up to date with exactly what’s going on in this ever-changing situation and have access to products across the whole of the market and can often find a better deal than your own bank may be able to offer you.
If you’d like further advice or help with finding the best deal on the market for you, contact one of our friendly mortgage advisors now.