Fixed Mortgage vs Tracker Mortgages

Are you looking to buy your first home? It’s a big step forward towards arguably the biggest purchase of your life and now more than ever, you need to be well prepared and educated. 

Some of the most common questions we are asked by first time buyers revolve around the pros and cons of taking a fixed rate mortgage versus a tracker mortgages.

Why take a Fixed Rate?

The simplest way to understand what a fixed rate mortgage is, is to compare this to something like your mobile phone contract or a Netflix subscription; You will know from outset, what your monthly payment will be for a set period.

A fixed rate mortgage is no different. The interest rate chargeable and the monthly repayments are fixed from outset and will remain unchanged for the initial fixed period, commonly for 2 to 5 years, but longer terms are available. No matter how the market changes, you will know exactly what you owe each month, making budgeting easier. This stability and predictability is ideal for first-timers seeking peace of mind.

Pros:

• Set monthly payments let you plan your finances effectively.
• No surprise interest hikes to worry about during the fixed period as the interest rate is fixed for this period.
• Potential to obtain an enhanced loan size with a longer-term fixed rate (typically 5 year fixed) thus potentially reducing the deposit required.

Cons:

• If there is a fall in interest rates, during your fixed period, you would not automatically benefit from this change and hence may end up paying more and for longer, if you have a longer-term fixed rate.
• If you decide to exit your fixed rate deal early for whatever reason, then this may incur early redemption charges (usually calculated as a percentage of the loan amount).

Why go for a Tracker?

Now, picture a tracker mortgage like a spirited off-roader – its interest rate follows the ups and downs of a fixed economic indicator, usually the Bank of England base rate. This can mean cheaper rides if the base rate dips but equally it also exposes you to potential bumps in the road if it rises, adding a touch of excitement (and maybe a little worry) to your financial journey.

Pros:

• Transparency: only economic factors can change your interest rates and if rates are cut, your rate will drop.
• Greater Flexibility: some tracker rate products come with no early redemption charges enabling you to find a better deal with another lender if the market changes direction and conditions become more favourable.

Cons:

• Unpredictable: if rates rise, so will yours, which can make budgeting difficult.
• Most trackers involve early redemption charges; you are locked into a fixed relationship with a lender potentially paying a rate several percentage points above the Bank of England base rate and if the base rate is hiked, it could mean huge future costs. Both in monthly repayments and/or in early redemption charges to exit this deal early.

So, which route should you take?

Choosing which option to go with depends on your unique financial outlook and risk appetite; Consider your financial tolerance, budget and long-term plans. It’s not just about finding the cheapest initial rate but choosing the mortgage product that is most suited to your specific circumstances and plans, both shorter term & longer term.

We have a highly qualified team of financial consultants London based, helping clients across the country. We are available to give bespoke advice on the mortgage type, rate, amount and term providing tailored recommendations unique to your circumstances.

 

It is important to take professional advice before making any decision relating to your personal finances. Information on this page is based on our current understanding and can be subject to change without notice, so the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only.