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Fixed, Tracker and Variable Mortgages: Which is Best for You?

When you’re looking for a mortgage, especially for the first time, there are a few terms you’ll need to get your head round: fixed rate, variable rate and tracker mortgages among them.

What do they mean? And which might be best for you?

Interest

The amount your mortgage costs you depends on three factors: how much you borrow, how long you borrow it for, and the rate of interest you are charged. Banks and building societies have a variety of interest rate options available.

What is a fixed-rate mortgage?

With a fixed-rate mortgage, the interest rate won’t change for an agreed period of time. That could be any number of years, from just one to ten or more.

Pros

  • If interest rates go up, you don’t have to pay any more.

  • You can budget effectively as you know what your monthly repayments will be.

  • It removes the risk of a sudden increase in costs due to changes in the economy.

Cons

  • When the term ends, you are moved onto the lender’s standard variable rate, which might be more expensive.

  • If prevailing interest rates fall, you don’t benefit.

  • If you want to exit the deal before the set term, you might be hit with charges.

Fixed, Tracker and Variable Mortgages

What is a variable-rate mortgage?

With a variable-rate mortgage – for example a lender’s standard variable rate (SVR) – the rate of interest you pay can change over the term of the mortgage. Interest rates usually follow the Bank of England base rate, but if the base rate goes up by, say, 0.5%, your lender may put their rate up by 1% or more. Also, they can increase the rate at any time for commercial reasons.

Pros

  • The rate charged can be less than for fixed rate deals.

  • If interest rates fall, your payment will fall.

  • There are generally no early repayment fees if you pay the mortgage off early.

Cons

  • Budgeting effectively over the medium to long term can be tricky, as you have no guarantee what your monthly repayment will be.

  • If interest rates go up you have to pay more, generally at short notice.

  • The rate can be higher than for fixed-rate deals.

What is a tracker mortgage?

The interest rate charged on a tracker mortgage follows – or tracks – an established economic indicator, usually the Bank of England base rate. If the base rate rises or falls, your mortgage interest rate rises or falls. While the interest rate tracks the base rate, it’s not the same as it – you can typically expect it to be a couple of percentage points higher.

Pros

  • The interest rate could fall, reducing your monthly payments.

  • There are no commercial rises applied.

  • The interest rate charged is generally less than for a fixed-rate mortgage.

Cons

  • The interest rate could rise, increasing your monthly payments.

  • Tracker mortgages can be for a set length of time, after which you’re transferred onto the lender’s standard variable rate, which could be more expensive.

  • If you want to get out of the deal early, you are likely to be hit with charges.

The type of mortgage that is best for you is likely to depend on your current personal circumstances. Do you need certainty, or are you willing to risk a rate increase for the chance of a fall? Taking advice from an independent financial advisor can help you to choose the right option.

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